The Blue Wave
August is here and the time has come to turn our attention toward the election. The polls are indicating that Biden has a lead over Trump in the presidential race. According to LPL Research, there have been bull and bear markets under both Democratic and Republican presidencies. Great! So, there is nothing to worry about, right? The larger issue lies with the implications of the Blue Wave. If Biden wins the presidential election, there is a chance the Democrats would also win the majority in the Senate giving us a single-party control in Congress. Shown in the chart below, the stock market historically favor a balance of power and performs better under a split congress.
Trump may not be out of this race quite yet though. More fiscal stimulus, a vaccine for COVID-19, or a quick recovery from the recession could provide a tailwind for reelection. Although these may not be enough to bring him back to office, we can also look toward the stock market for an idea of the outcome as well. According to LPL research, the stock market has predicted 20 of the past 23 presidential election winners. Historically, if the S&P 500 Index were up three months before an election, the incumbent party has won.
As research has shown, we have had bull and bear markets under Democratic and Republican presidents. Biden’s win may be no different. It is estimated that Biden’s tax plan includes raising corporate taxes from 21% to 28%, doubling the tax rate on certain foreign income, and imposing a minimum tax rate of 15%. According to a Goldman Sachs analyst, this tax plan would reduce S&P 500 earnings estimate for 2021 by $20 per share or 11.7%. This would undoubtedly create a headwind for the market as we anticipate a reversal on some of the gains created from the Tax Cuts and Jobs Act. On the other side though, Biden would be inheriting a weak economy. JPMorgan Chief Equity Strategist, Lakos-Bujas, discusses how “business recovery and job growth are likely to be prioritized over policies that could dampen economic growth and perhaps even jeopardize the desired 2022 midterm election.” Due to the economic weakness, Biden’s tax policy may not end up as severe as what is currently estimated. Further policies Biden may propose include infrastructure spending, softening tariffs, and higher wages. These policies could end up being a net positive for the market and potentially offset some of the tax policy.
So, let us say Biden gets elected and a Democratic sweep happens. If you feel that this will negatively impact the market, consider taking some steps to potentially hedge the political downturn. With the NASDAQ and S&P 500 near record highs, it may be a good time to take some of those gains and rebalance into a more conservative allocation. This can be accomplished by increasing cash and bond exposure or investing in something with a guarantee, like a fixed annuity.
If you think some of the policy changes could help the market, here are some areas you may want to have exposure to:
Stocks/Funds that focus on Infrastructure or ESG. Between the increased spending on infrastructure and incentives for use of alternative energy, you could see companies involved with these get a boost from policies.
Biden has emphasized the reduction of trade barriers with China. Those companies that do a lot of business overseas may benefit from this retraction.
Of course, if you are not one to play with your crystal ball and have no idea what’s going to happen with the election, there are still steps you can take. Now is as good of a time as ever to revisit your asset allocation and make sure they line up with your goals. Did the most recent drop back in March give you a mini heart-attack? Consider taking some risk off the table. Did you find it to be an opportunity to invest? Possibly take some of those gains you made and rebalance to where you were pre-COVID.
Overall, depending on whether you believe the market will go up, down, or sideways, there is still an opportunity here for you. The future is cloudy, and it is impossible to predict what will happen. Either way, we know markets historically favor checks and balances, and as of now, we are edging closer to the possibility of a Blue Wave.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Asset allocation does not ensure a profit or protect against a loss.
Sources:
Franck, Thomas. “Buy This 'Democrat Agenda Outperformers' Basket to Play a Biden Election Victory, JPMorgan Says.” CNBC, CNBC, 7 July 2020, www.cnbc.com/2020/07/07/stocks-to-buy-jpmorgan-likes-these-stocks-if-joe-biden-wins-the-election.html.
LPL Financial. “Mid Year Outlook 2020.” Ceros, 2020, view.ceros.com/lpl/mid-year-outlook-2020/p/6.
Tracking #1-05043212