July 28, 2020
With a little more than three months until the Presidential election, we are hearing more inquiries from investors regarding how the markets might be impacted in the case of a Biden victory, or more consequential, a Democrat sweep of congress. While we will not offer any predictions, those two scenarios, are among the probable outcomes given current polling data.
At the time of this writing, President Trump is considerably behind in the polls. Joe Biden, has about a 10 point lead over President Trump, which would seem a difficult deficit for the President to overcome in the Electoral College. Our observation is that polls are not the election, and while the size of the President’s polling deficit may be debatable, it is the direction of the data that is more noteworthy. Just last month Trump trailed by only five points, a level that seemed much more surmountable. The signal that support for the President is deteriorating so quickly, suggests that he may face an extraordinarily challenging fight to reelection.
Equally significant is the possibility of the GOP losing the senate. The breakdown of this scenario is much more complex, however, it appears at this time that the equity market is pricing in a Democratic sweep. That said, in 2016 the market did the same thing.
What does this mean?
It’s important to bear in mind that historically, the markets don’t convey much information about the election other than the immediate three month period before the election. While market participants are watching the direction of current polling data and the possible outcome, markets are currently being much more influenced by factors such as the economic and financial impacts of the Coronavirus, its impacts on global trade, fiscal stimulus and the likelihood of a global economic recovery to name a few. In addition, the memory of 2016 still is fresh. In that election, the market had ostensibly priced in a Clinton win, and many strategists had projected a 10% to 15% sell-off in the case of a Trump victory. In fact, the market reacted with a move to the upside upon Trump’s election. So, we would advise taking any guidance on this from the market with some skepticism as these prognostications are really only raw conjecture salted with speculation.
In our view, the most likely outcome of a Democratic win in November is a restructuring of the tax code, resulting in potentially higher personal and corporate taxes. As this pertains to the markets, if that were the case, we would expect that the time between Election Day and the end of December would see a large increase in special dividend payments as corporations seek to make payouts before a tax increase in 2021. Back in 2012, more than 1,100 companies paid a special dividend after that election, and ahead of the tax increase on dividends from 45% to 50%. The proposed tax increase for 2021 would raise the rate on dividends from the current level of 40% to 59%. While this increase may or may not come about, corporations may seek to get ahead of a potential increase by pulling forward some 2021 dividends to the 2020 calendar year.
Secondarily, the prospect of a higher overall tax rate structure could result in a market rotation toward the value style of investing, in place of the growth trend that has been dominant for several years. To the extent that a higher percentage of corporate revenue is ultimately earmarked toward taxes, corporate financial discipline could become a more important consideration. In addition, it’s not a stretch to project that in a slower growth environment than we’ve seen in the last few decades, valuation could play a bigger role in investment return as well. Either way, we think that maintaining a balance to growth and value stocks is prudent.
Not to be overlooked, is the Federal deficit which is growing at what could be considered a rather concerning pace. The politics of the tax cut, stimulus packages and overall budgets of late can be debated, however, the reality of the ballooning deficit is that it will need to be paid for. There are alternatives to how this could be accomplished, but history shows that it is likely that we will see a decline in the value of the dollar over time. Whether or not a Democratic House, Senate, and Executive branch, has the fortitude to address the situation is unknown. But, if the can is kicked down the road for another four to eight years, the issue will only compound, placing a ceiling on potential economic growth. In our view, this could result in international investments becoming more interesting, as growth opportunities may be more available there. Again, the prudent strategy is to maintain investment in a properly diversified portfolio, based on your risk tolerance. As things develop, tilts and adjustments to the most attractive areas can be made.
One last point on elections; historically, there has been little consistency in post-election market movements in reaction to either Republican or Democratic Presidential wins. As alluded to above, even experienced strategists are challenged to predict market movements based on elections, as seen in 2016. There is always much more to the story than who is in the White House. So, we would discourage any investor from speculating on the election, and instead suggest that a properly allocated portfolio is the best solution.
That said, while the markets have yet to show meaningful guidance on election sentiment, we are watchful and feel confident in our current positioning across asset classes and investment styles. If any new macro or industry trends seem compelling in the meantime, we will adjust accordingly.
Of course, if you would like to discuss the above, or have any other questions, feel free to contact your Atlas Wealth Management Advisor.
 Strategas – Policy Outlook report, July 13, 2020