If prior elections are a guide, the outcome of the 2020 Presidential election is unlikely to fundamentally alter the course of the U.S. economy and financial markets. It will have an impact, however. A Biden administration will have a different economic agenda than the Trump administration, and there are potential implications for personal finances and the outlook for various areas of the markets.
Every president has plusses and minuses from the perspective of financial markets. For Biden, the potential positives include an economic stimulus package to counteract the COVID-19 pandemic (both Biden and Trump supported further stimulus). Biden will also likely attempt to reduce trade tensions and recommit to post World War II economic alliances. This approach could well boost profits for the multinational companies that make up the bulk of major market indices.
On the flipside, Biden is likely to seek to raise corporate and personal income taxes, and re-regulate some industries that we rede-regulated by the Trump administration–neither of which are likely to translate to better Wall Street sentiment.
For now, we expect economic stimulus to be front and center for the markets. Spending could be funded through a combination of tax increases and higher federal deficits. On this point, investors should remember the lesson from past occasions of deficit-funded stimulus: the potential good is likely to matter before the potential bad. That is, economic stimulus could have an immediate and positive impact, while the potential for significantly higher interest rates and inflation may be a concern for years down the road.
Finally, with the GOP currently favored to maintain control of the U.S. Senate, a Biden administration may be limited in what it can accomplish from a legislative standpoint. Thus, sweeping changes to industry regulation and tax policy are unlikely. Accordingly, the election outcome is unlikely to be a game-changer for the economy and markets.
In the coming weeks, Wall Street will analyze Biden’s cabinet appointments for clues into the administration’s direction. In the meantime, the following is a list of potential market implications and policy initiatives associated with a Biden administration. Were iterate that divided party power reduces both the likelihood and potential impact of these initiatives.
Potential Policy Initiatives of a Biden Administration
(While it is unlikely all will be implemented, these are some of the likely changes to be considered)
· Increase the top individual tax rate for taxpayers with incomes above $400k to 39.6% from 37%
· Tax capital gains and dividends at 39.6%.
· Cap itemized deductions at 28% for the top tax bracket.
· Tax long-term capital gains and qualified dividends at the ordinary income tax rate for incomes above $1mn
· Impose payroll tax on wages earned above $400k
· Increase 401(k)/IRA incentives
· Expand a number of tax credits including the Earned Income Tax Credit for childless workers aged 65+ and renewable energy tax credits for individuals
· Reinstate State and Local Tax (SALT) deductions
· Eliminate step-up in basis for the estate tax
· Increase the corporate income tax rate to 28% from 21%.
· Increase the tax rate on foreign subsidiaries of US firms from 10.5% to 21%
· Impose a minimum 15% tax on US-based corporations with a book profit of $100mn or higher
· Reduce real-estate tax preferences
· Offer a Manufacturing Communities Tax Credit to businesses that experience large workforce layoffs.
· Expand the New Market Tax credit for investment in low-income, distressed communities
· Provide tax credits to small businesses for adopting workplace retirement savings plans
· Create a $2tn clean energy infrastructure fund to be deployed during the first term with a focus on transportation funding
· Invest $300bn in domestic R&D to improve US systems (clean energy, public health, telecoms and infrastructure) and promote domestic production
· Expand broadband, or wireless broadband access via 5G
· Raise federal minimum wage to $15/hour and index to the median hourly wage
· Ban state-level “right to work” laws
· Establish a federal right to union organizing and collective bargaining for all public sector employees
· Provide individuals with the ability to purchase a public health insurance option like Medicare
· Eliminate income-level cap on tax credits for individuals purchasing insurance on government exchanges and lower the limit on the cost of coverage
· Lower the Medicare eligibility age from 65 to 60
· Allow for direct Medicare negotiation of drug prices
· Provide grants to states that want to eliminate tuition at public colleges and universities for students and families with <$125k in income
· Offer free tuition at all community colleges
· Create universal Pre-K
· Double the size of the maximum Pell Grant award
· Offer public servant loan forgiveness
· Increase K-12 education funding for low-income schools
· Push the US away from fossil fuels by raising the cost of fossil fuel production through regulation and higher taxes while lowering the cost of renewable energy through subsidies for wind, solar, electric vehicles, and biofuels. Seek carbon neutrality in the US by 2050.
· Seek a carbon-pollution free power sector by 2035
· Ban Fracking on public lands and introduce a moratorium on offshore drilling
· Rejoin the Paris Climate Accord and rally other nations to increase their emissions reduction targets
· Expand several renewable-energy tax credits and end subsidies for fossil fuels
· Invest in the US automobile infrastructure, including 500k electric vehicle charging stations
Sources: Hefren-Tillotson, Goldman Sachs, Strategas