The US election is still over three months away, yet investors have already begun to price in a victory for Democratic candidate Joe Biden, such is the expectation that he will assume the presidency in November, according to asset manager Schroders.
The asset manager claimed that the economic situation in the US and latest polling figures are enough to reasonably predict a Biden victory over incumbent Donald Trump.
The Democrat is currently ahead in all the battleground states, although a lot can change between now and the election, particularly as the economy recovers and the televised debates take place.
However, investors seem sure of a Biden victory and below Schroders global strategist Sean Markovicz outlines what this will mean for the US stock market.
Biden leads in the battleground polls
Source: Real Clear Politics, Schroders Economic Group
A widely held assumption among investors is that a Biden victory would be bearish for equity markets, although Markovicz said this assumption could be premature.
There is widely held belief that Democratic presidents tend to impose more business-unfriendly policies such as increased regulation and tax increases.
Although, as the strategist explains, the reality is a bit more complex.
“Presidential policies are what investors should be focused on,” he said. “Not their party affiliation.”
“For instance, although Trump’s tax cuts were positive for equity markets, his handling of foreign policy and trade issues had the opposite effect.”
Historically, there is also little to suggest a Democratic president would be bearish for equity markets.
Based on the last 22 elections going back to 1933, stock prices have on average fallen in the final three months leading up to an election whenever the incumbent party lost, but stocks rallied if the incumbent won. This is irrespective of party affiliation.
“Investors value continuity and dislike change,” Markovicz explained.
As such, the data appears to disprove assumptions that Democratic presidents are worse for the market.
Stock market returns since 1933
Source: Datastream Refinitiv, Schroders
“Historically, on average, Democratic presidents have presided over higher stock market returns than Republican ones,” he noted.
Data from Schroders showed that average total return (adjusted for inflation) for the S&P 500 under Democratic presidents was 10.2 per cent versus 6.9 per cent for Republicans.
“Either political party can be assumed to be bullish or bearish in equity markets,” he noted. “What we believe is more important are the policies presidents choose to enact and their net impact.”
Markovicz believes that the greatest risk to US equity markets is the potential of increasing the rate of corporate tax.
In 2017, Trump lowered the corporate tax rate from 35 per cent to 21 per cent, resulting in a major boost for equities. However, Biden wants to increase this to 28 per cent in early 2021, which would have big implications for US companies.
Data from UBS shows raising the tax rate to 28 per cent would lower S&P 500 profits by 8 per cent.
“A Biden victory would see investor preference shift away from US equities and towards the rest of the world,” said the Schroders strategist.
Having said that, geopolitical tensions are also bad for US equities, and Markovicz believes a Biden presidency would sooth simmering tensions abroad. However, it is likely that tensions between the US and China will continue, especially surrounding technology and trade.
“There is a high chance Biden will restore economic cooperation with Europe and Asia, while also easing up on tariffs,” Markovicz said. “This would inject a degree of predictability and stability into global affairs, which would be a welcome relief for global markets after a volatile few years.”
The impact of a Biden presidency is also likely to be amplified should there be a Democrat clean sweep in the Senate elections also due to take place in November.
“If there is a Democratic sweep of Congress,” he said. “US share prices are likely to price in an increase in corporate tax rates. This would bolster the appeal of non-US equities, especially if coupled with reduced trade frictions.”
However, Biden’s proposed tax reforms would be unlikely to pass if Republicans retain control of the Senate.
“But as most foreign policy decision-making resides with the president, we can still expect an improvement in international relations,” said Markovicz. “This combination of the tax status quo and a defrosting of international relations would be the best-case scenario for global markets.”