Wealth Management: Market Perspective – US election brief

Circumstances matter more than presidents

In September 2016 we suggested the presidential campaign then underway was the noisiest in recent memory. It seems 2020’s campaign – the 59th – may have eclipsed it: the pandemic, renewed trade quarrels, civil unrest and strident personality politics are all playing a part in this heated race.

Joe Biden’s near double-digit lead in the polls – sustained since early June (figure 3) – suggests he has a good chance of beating President Trump on 3rd November. The opinion polls are by no means decisive: Clinton’s experience in 2016 exposed the shortcomings and biases in such data. But his national lead is bigger than hers at this stage, and he has been ahead in several swing states, boosting his chances in the electoral college, though his leads there have narrowed recently.

For investors, such a change at the White House could herald a significant change in US economic and financial policies, stock market leadership and the US’s international investment appeal.

Of his more contentious election pledges, higher corporate taxes may be the biggest threat for investors, alongside a more intrusive stance on drug pricing, oil exploration and financial regulation – in some cases reintroducing regulation repealed by the Trump administration. His proposal to challenge technology stocks’ dominant market positions threatens the relatively narrow stock market recovery, though they are already facing scrutiny under the current administration.

Four more years?

In narrow investment terms, President Trump has had a noisy but ultimately unremarkable four years in the Oval Office. US equities have returned a respectable 13% a year (after inflation), despite the COVID-19 crisis – a figure that compares favourably with the post-WWII average of 9% a year.

The combination of low inflation and interest rates, respectable growth and low unemployment (the suppression of COVID-19 aside) and business tax cuts all helped the market. The Tax and Job Cuts Act of 2017 – the first major change to US taxes since an almost-as-idiosyncratic Ronald Reagan’s first term – is arguably Trump’s major legislative success.

On other pledges, his ‘Contract with the American Voter’ has been less successful. Grand infrastructure proposals, educational reform, Obamacare repeal and revised immigration policies failed to pass muster with Congress. There has been ongoing brinkmanship, including the longest ever US government shutdown at the start of 2019. The Wall wasn’t built and Mexico didn’t pay for anything.

Meanwhile, Trump’s focus on realpolitik and a mercantilist ‘America First’ policy has accelerated the US’s retreat from the international stage and prompted a departure from key supranational organisations and environmental accords.

In this context, the possible shift to a more collectivist, but internationalist, outlook may not seem threatening (figure 4), particularly when you remember that a Democrat in the White House does not necessarily translate into poor economic and investment performance.

Biden: Less economic nationalism?

Biden’s pro-regulatory stance should be seen alongside pledges to promote social equality, green initiatives (including $2 trillion spending on clean energy by 2035), new infrastructure spending and a less hawkish stance on China. It may also revive the US’s role on the international stage – a possible resumption of global leadership, and a return to economic integration and multilateralism generally.

There may well be some market unease – higher taxes would hit corporate profits hard: increasing the corporate tax rate might hit full-year earnings by ~10%. But other developments might offset the hit for investors, as has happened in the past. On the half dozen occasions that corporate income tax rates were increased in the post-war period, the S&P 500 was up, on average, in the 12 months that followed.

The chances of this happening may be helped if, as seems likely, the proceeds of higher taxes were largely recycled into higher government and consumer spending, supporting business revenues. In the longer term, infrastructure and environmental initiatives could foster more sustainable growth.

The starting point is a marginal US corporate tax rate toward the lower end of the OECD range (figure 5). Effective US tax rates are even lower.

As we’ve noted often, context matters as much as any president’s political complexion. There are many moving parts in the US and global economy, and domestic politics are not the only driver of investment returns, as this year has very visibly shown. Moreover, election manifestos are rarely fully implemented, and a Democratic clean sweep of Congress – far from certain – will be required for some of the more contentious policies.

Our investment advice, then, would be to recognise the potential changes in policy; ensure that portfolio insurance is in place; but wait for more clarity, and stay open-minded about the evolving wider context.

After all, there is no such thing as a safe bet in politics, as in investing. With almost two months to go, ongoing economic recovery and vaccine-related developments could shift sentiment and those unwavering opinion polls.

So too could a Democratic party that may have forgotten Politics 101. If your opponent is at one end of the political spectrum, you don’t beat them by going in the opposite direction, but by moving closer to the middle.

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