Advisor Talking Points: The Stock Market – What If Biden Wins?
On June 30, 2020, the U.S. stock market ended its best quarter in more than 20 years. This has been a stunning comeback after the Covid-19 pandemic brought business around the world to a virtual standstill.
Year-to-date, the S&P 500 Index is only down -1.4%, and for the past year, it is now up 6.4%. The tech-heavy NASDAQ index is up year-to-date 18.3%, and it is currently up 29.4% for the past year.
Could The Mismanagement Of The Reopening Slow Or Hinder The Economic Recovery?
The answer is yes! The calendar says July 12, but it feels more like April 12 when it comes to battling this Coronavirus. Once again, cases are surging. The ten worst days for new cases nationwide have occurred over the past 11 days. Once again, we are facing shortages of protective gear, of tests, and of ICU beds for COVID-19 patients. And once again, we are left to wonder, how did we get here again?
Other countries are successfully reopening their economies and schools. Why is America failing to flatten the curve on this pandemic?
Is it because of politicians who remain in denial of the disaster unfolding on their watch? Is it because states chose not to listen to health experts and re-opened too soon? Or is it because of things like this, too many Americans refusing to social distance and not wear masks, deciding they are immune, or that the experts were wrong? Or that they have a right not to wear a mask? Or is it all of the above?
Now the federal government is urging schools to re-open with safety protocols at odds with CDC scientists and pointing to Germany, Denmark, Norway and Sweden as examples of countries that have re-opened schools safely. Last Friday those countries had about 1,000 new cases combined. On that same day, the United States had roughly 70,000 new cases. Daily death totals in Arizona, South Carolina and Texas are up by more than 100 percent in the past month.
Our response to this pandemic is clearly failing. In every other natural disaster in U.S. history the federal government, through FEMA or some other agency, has developed a national plan which it led, coordinated and executed with local leaders.
For the first time, the federal government has left the response to a patchwork of plans developed by local officials, school boards and governors. A few seem to be working but most have not. These local officials and governors have no experience in managing a crisis of this magnitude with a pandemic that respects no local or state boundaries.
All of the usual ways to fight pandemics—diagnostic testing, contact tracing, personal protective equipment, wearing face masks—are faltering.
Why Have Other Major Countries Been More Successful?
A recent survey conducted by Bloomberg of epidemiologists and health officials in Europe and the U.S. gave their views as to why the U.S. was failing to control the Coronavirus:
- A clear consistent national plan coordinated by the federal government.
- Clear and consistent national leadership.
- Robust testing and contact tracing.
- Science-based decisions not influenced by politics.
- Mask wearing mandated and not politicized.
- Closures of hot spot facilities enacted quickly and lifted slowly.
Despite Covid-19 Spikes—How Is The Underlying Economy Performing?
With the exception of the broad travel and hospitality industry, which the stock market has already significantly discounted until there is a widely available vaccine, the rest of the U.S. economy is recovering nicely.
Although airlines and hotels are publicly traded, most bars, restaurants, professional sports teams, etc. are largely privately owned companies and have almost no effect on the S&P 500 or the broader stock market. While no one wants to see bars closed for any length of time, if you closed down every bar in America for a year, it would cause a decline in U.S. GDP of less than 1%.
What Are The Leading Economic Indicators Telling Us?
Right now, the best way to understand the health of the entire U.S. economy is by following the Leading Economic Indicators (LEIs). LEIs tend to go down before other coincident and lagging U.S. economic indicators. They track data on many key indicators like production, employment, income and sales. They have always been an early-warning system for the economy.
Until now, the economy has been on a V-shaped recovery trajectory. But if you look closely, the growth rate is starting to slow. The recovery is currently on track, but where does it go from here? This has to be watched carefully to see if there are any signs of deceleration. I will update this graph in a few weeks.
Although we may see some volatility and normal stock market pull-backs over the summer, I believe the stock market will generally trend up for the rest of the year.
Don’t Fight The Fed
The most significant driver of stock prices is the huge amount of liquidity that Congress and the Federal Reserve have injected into the economy in an effort to offset the economic damage caused by the Coronavirus pandemic.
Markets have primarily been resilient because investors expect further support from Congress and the Federal Reserve if the pandemic begins to slow the economy again.
Markets are able to take the Coronavirus news in stride because there is no sign the government is ready to slow stimulus measures. Citibank predicts $6 trillion in major central bank asset-buying over the coming year. Congress will eventually pump at least $4.5 trillion into the U.S. economy in 2020.
An investor can now make more in current income from dividend paying stocks than from high-quality fixed-income securities while participating in any future appreciation in stock prices. Stock prices can always go down, but over the long-term, they have generally appreciated.
If Trump Loses, How Will The Stock Market React?
Over the past few weeks I have received a large number of requests to comment on how the stock market would react if President Trump lost the election.
Last week I spoke to a number of long-time political operatives here in Washington DC that have previously worked on both Republican and Democratic presidential campaigns. I also spoke to seven Wall Street analysts who cover politics for several of the largest Wall Street banks.
If The Election Were Held Today….
The presidential election will take place in just over 100 days.
According to RealClearPolitics (RCP) composite polling numbers, if the election were held today, President Trump would likely lose the popular vote by 9% (Biden 49.3% to Trump’s 40.3%).
With regard to the Electoral College, the winner needs 270 electoral votes. The Democrats currently have 232 solid electoral votes and the Republicans have a solid 204 votes, with “toss up states” holding 102 votes.
However, Trump is currently losing to Biden in all six toss up states of Arizona (-2.8%), Florida (-5.2%), Michigan (-7.5%), North Carolina (-3.3%), Pennsylvania (-6.5%), and Wisconsin (-6.5%). These six toss up states represent an additional 102 electoral votes likely to go to Biden. That means he could possibly win the Electoral College by 334 electoral votes to Trump’s 204 votes.
Cautionary Note: The election is over 100 days away and anything could happen and everything could change. These are just the current polling projections as of July 12, 2020.
Like 2016—Could The Polls Be Wrong?
We all know the 2016 stories. The polls were wrong. People lie to pollsters, or Trump voters simply don’t talk to pollsters.
Clinton did win the popular vote over Trump by 2.9 million votes. National polls missed Hillary Clinton’s popular-vote margin by just one percentage point. The RealClearPolitics average of polls on the morning of the election showed her 3.2 points ahead of Trump. This was within the polling margin of error.
According to the Cook Political Report, “given current state voting patterns, Democratic voters for president are spread much less efficiently around the country than Republican voters. Democrats run up big vote margins in California, New York, and Illinois, while Republicans win their most populous states with lower margins, “wasting” fewer votes. Thus, Biden will need to win the national popular vote with room to spare to hit 270 electoral votes—obviously 2.1 percentage points wasn’t enough for Clinton in 2016. Presumably a Biden margin above 4 points would more than cover a situation like last time, when Trump’s paper-thin margin of two-tenths of a percentage point in Michigan and seven-tenths of a point in Pennsylvania and Wisconsin (fewer than 78,000 votes total out of 137 million cast nationwide) tipped the balance and the outcome.”
At this point in 2016, during the first half of July 2016, Clinton’s lead over Trump in the RCP average was 3.2 points, but in the last week of the month the race pulled even and Trump briefly pulled ahead by as many as 1.1 percentage points.
Biden’s current lead in the popular vote of over 9% is well outside the margin of error. In the Electoral College vote Biden leads in all the toss up states and his margins are outside the margin of error in four of those six states.
Will Republicans Lose The Senate?
The Senate is currently made up of 53 Republicans to 45 Democrats, with two Independents that caucus with the Democrats.
If it turns out to be a relatively close election and Biden wins, I would expect the Senate to remain Republican.
But if Biden wins by a larger margin, the Democrats are likely to pick up a net of four seats and would take control of the Senate. However, it also looks possible for Democrats to pick up an additional two to three other seats.
The Senate is important because of the possible Trump tax cut roll-back. Normally the Senate needs a two-thirds vote to pass major bills like tax increases.
Also, judicial appointments and Supreme Court appointments could be affected by a switch in control of the Senate. Judicial appointments now only require a simple majority to pass.
How Would Wall Street & The Stock Market React If Biden Wins?
According to the analysts I have spoken with, these are their two key areas of concern:
- Biden wants to roll-back the Trump tax cuts and return everything to the tax structure during the Obama-Biden period.
- While he doesn’t favor the Green New Deal, he does endorse some of its provisions.
Here is a list of companies and industries that will be negatively affected by a Biden presidency:
- Defense companies, which are viewed as beneficiaries of the Trump administration’s push to sell weapons to Saudi Arabia and the Middle East.
- Oil and Gas Industry will have issues of access to federal lands for drilling and increased carbon regulation of refiners.
Some analysts have stated that a Biden presidency could be a source of stability for international trade. In the past Biden has supported free-trade agreements like NAFTA and all the analysts felt his trade policies would be less erratic than those of Trump. They believe that the on-again, off-again trade, tariff and technology war with China has generated too much volatility for stocks.
In my conversations with Wall Street analysts, all of them felt that if Biden is elected, his first priority will be to get the economy recovering to where it was in 2019. They all thought that a severe increase in taxes and regulation would work against that.
Given the current economic weakness, business recovery and job growth are likely to be prioritized over policies that dampen economic growth and perhaps even jeopardize the desired 2022 mid-term election outcome.
Some analysts also believed that if there were a corporate tax hike, it could end up being a rate lower than 28% and would be offset by the elimination of Trump’s tariff tax on Americans and more infrastructure spending.
There was also a consensus that Biden would engage in a more traditional diplomatic approach to domestic and foreign policy that would likely result in lower equity volatility and risk.
Most have accepted that Biden could be the winner, but they all believe he will move slowly and gradually on taxes and regulation.
One JPMorgan Chase analyst said if Biden won, it would be “neutral to slightly positive” for the stock market. They believe that Biden would moderate his policy proposals including raising taxes on the rich and corporations to fit the fragile and weak recovering economy he will be inheriting.
According to Sam Stoval, Chief Investment Strategist at CFRA Research, “there have been five times since World War II when a Democratic president was backed by a unified Democratic majority in Congress: 1948, 1960, 1976, 1992, and 2008.” On average, the S&P 500 Index declined initially by 2.4% right after the election in November following those Democratic sweeps. But by the next month in December, the S&P 500 had gained an average of 3.1%, advancing in every instance before the end of the year.
When Obama succeeded George Bush in 2008, as the recession and financial crisis was just hitting America, the stock market did decline about 7% after Obama’s first election. When he was re-elected in 2012, the stock market climbed almost 2.5%.
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Paul Dietrich is the Chief Investment Strategist for B. Riley Wealth Management. B. Riley Wealth Management offers comprehensive financial solutions to clients through its network of over 160 experienced financial advisors across 13 states. The firm manages more than $11 billion in client assets and serves approximately 34,000 client accounts.