The outcome of next month’s Presidential Election is likely to be of great consequence for the US economy and financial markets. Given former Vice President Joe Biden’s recent gains in the polls, it’s possible that the market narrative driving markets could turn if Biden clinches a victory in November.
This narrative shift means that investment strategies that may have worked over the past six months could struggle to maintain their momentum as we move into the coming year. That’s why regardless of your political leanings, we believe that it is critical now more than ever to consider how a change in the White House might affect your investment portfolio in the coming years.
Can We Trust the Polling Data?
Who’s going to win the Presidential Election? Well, a lot can happen in a few short weeks. Nevertheless, Joe Biden has recently enjoyed a double-digit lead ahead of President Donald Trump in the national polls. According to surveys compiled by FiveThirtyEight, Biden is leading Trump by an average ten percentage points at the national level.
Even so, when it comes to presidential elections, what history has shown is that the polling data coming out of state-by-state contests are more instructive than the national figures themselves. And this point was made abundantly clear in 2016 as Hillary Clinton won the national popular vote but lost the electoral college as she trailed in battleground states.
How is Biden projected to do in these critical state races? Well, if elections were held today, data suggest a likely Democratic sweep in the Presidential and Congressional races. This outcome is reflected in data for crucial states like Florida, Pennsylvania, Michigan, and Wisconsin (states lost by Clinton) where polling is more favorable of Biden win.
So, what might such an outcome mean for your investment portfolio? Well, a Democratic sweep could bring significant changes in tax policy, fiscal spending, and infrastructure initiatives that may shift some investor preferences while at the same time bringing in a new set of investment opportunities. Let’s take a look at some of these potential changes in a little more detail.
Potential Pivot Out of Growth?
The tax plan outlined by the Biden campaign is a big deal. It’s crucial to remember that the Tax Cuts and Jobs Act (TCJA) passed in 2017 promised a boost to economic growth as tax rates on high earners and corporations were lowered significantly. Biden has promised to roll back certain provisions of the TCJA to pay for his administration’s economic policies. So, what exactly does this mean for the individual investor?
Well, under the scenario of a Biden win, there is a greater incentive for investors to cash out on asset classes that have performed well in recent years. To be sure, the rally in growth-oriented stocks has been seemingly unstoppable over the past few years. More recently, strong performance in this segment of the markets has been underpinned by a flood of cash resulting from government spending and easy central bank policies. Even so, investors will have to contend with two vital issues under a new administration.
First, the prospect of diminished after-tax corporate earnings likely will make it harder to justify holding investments already trading at a significant historical premium. Put differently, growth is expensive, and higher taxes won’t make them any cheaper. And second, the prospect of higher future capital gains taxes might incentivize some investors to lock in tax liabilities at today’s lower capital gains rates. From this perspective, it’s quite possible that the once favored growth/tech sectors could underperform the broader markets following a Biden victory.
While it might take months for a bill to make its way through congress, market participants likely won’t wait around to reposition themselves ahead of such a move. In fact, it’s quite possible that investors could rotate out of favored sectors shortly after an election day win. This means that market sectors that have benefited from lower taxes are likely to face headwinds given higher tax prospects.
Another point to consider is that under a new administration, government spending will likely rise substantially due to additional fiscal stimulus and changes in economic policy. As of this writing, congressional leaders are still trying to strike a deal on another round of fiscal stimulus that would address the COVID-related economic slowdown. Whether this package is agreed to before or after the elections, another roughly $2 trillion in government spending will likely make its way into the economy in the months ahead.
This much needed fiscal boost comes at a time when data show that US economic growth is recovering but remains at risk of stalling out. Indeed, weekly jobless claims data this week showed that the number of individuals seeking unemployment benefits rose to a two-month high after declining in recent weeks. And without additional government spending, recent economic gains are likely to falter, leading to stagnating growth and a long road to recovery.
Under Democratic plans, a second stimulus bill would provide support for households and businesses and give aid to state and local governments (a point contested by GOP leaders). From an investment perspective, this additional fiscal boost to state and local governments could open the door to attractive income-oriented opportunities, most notably in the municipal bond space.
What’s more, for an economy struggling to regain its pre-coronavirus footing, relatively higher government spending levels would likely be favorable overall for economic growth. In such a scenario, the pivot away from growth-oriented sectors resulting from higher taxes might lead to greater favor for value and cyclically oriented parts of the market as government spending raises expectations of a faster economic recovery.
Infrastructure Spending and Industrials
It’s also important to note that Biden has proposed policies that could inject over $5 trillion into the US economy over the next decade, with infrastructure leading the spending push. Under the Build Back Better plan, a Democratic sweep could finally usher in a long-awaited infrastructure bill that puts individuals to work addressing the country’s crumbling infrastructure.
While the stimulus bill waiting in the wings could likely support a rally in cyclical sectors broadly, the Biden campaign’s proposed policies may also provide an additional boost to the industrial and materials sectors, specifically as money pours into national construction projects. What’s more, a Biden administration focused on achieving a carbon pollution-free power sector by 2035 might underpin opportunities in the green-energy oriented space and further support gains in certain Environmental, Social, and Governance (ESG) investments.
Reduced Foreign Policy Risk Premium
Finally, an administration change could reduce the foreign policy uncertainty premium that has arguably supported US over international investment exposure. On the China front, Biden is likely to push forward on completing a trade deal with China (and Europe). What’s more, it’s also possible that the narrative surrounding trade negotiations under a new administration might present fewer surprises and thus even out policy uncertainties compared to Trade War related events in recent years.
This lower risk premium, combined with ultra-loose Fed policy, could place downward pressure on the US dollar and potentially incentivize increased investor exposure to global investment opportunities. Structurally, we’ve laid out a case for investing in emerging markets for the long-term, but such an outcome could be favorable for non-State Owned Enterprise (SOE) Chinese stocks in the short run.
Domestically, greater policy uncertainty could provide more favorable prospects in traditional high yield opportunities. Like international asset classes, high yield bond prices are susceptible to sudden swings in market sentiment. With a reduced policy risk premium, income-oriented investors might benefit from higher-quality “fallen angel” opportunities in the high yield space.
Look for Investment Opportunities in a Biden Win
Taken together, a Biden win might usher in a greater need for tax efficiency and less reliance on capital gains for income-oriented investors. A change in the White House may also mean a shift in the market narrative that is balanced less towards growth sectors and more towards cyclicals as fiscal spending boosts economic growth up in the coming year. Finally, the foreign policy risk premium that has favored US markets in recent years could open the door to more international opportunities as foreign policy-related volatility ebbs.
In either case, in the days leading up to the election, markets are likely to ebb and flow along with a host of unknowns. As an investor, you may be rethinking your market risk exposure or even contemplating exiting the markets altogether before election day. To be sure, whatever the outcome might be, November 3rd is likely to mark a turning point for the next chapter of the dominant market narrative.
Even so, during this time of uncertainty, we recommend that you consider these post-election investment opportunities before the narrative shifts while staying committed to your long-term investment plan and positioning yourself for higher levels of market volatility.