This blog on the 2020 election and how it impacts stock markets is a modified transcription of the virtual event that was hosted on July 17, 2020.
There is still a lot we don’t know right now surrounding the 2020 election and its impact on the stock market. Some trends are starting to come into clarity as we approach a market-focus and the market becomes more fixated on the November elections. The first is that the data suggests that Trump is starting to meaningfully trail in states he needs to win. The second is that in states where he was a large winner in 2016, he is starting to lose the wide margin he had in the early part of the year, specifically Texas and Georgia. When you look at polling (we know there is a lot of distrust in polling, but we take it at face value for data points), Trump looks tight in several battleground states and is starting to trail in some swing states.
This is likely a result of the economy – as James Carville said, “it’s the economy, stupid.” The percentage of Republicans and Democrats who rate the economic conditions as good or excellent has recently gone down. Previously, 80% of Republicans rated economic conditions as excellent or good, and now that number has dropped to 37%. Only 11% of Democrats rate economic conditions as excellent or good. The economy is impacting what we expect to happen in November and you are seeing that play out in election odds. You are starting to see that in late April/early May which coincides with the second surge of COVID-19. Studies show that 75% of the population is currently shut down or restricted on activity in their city and that has translated into a flip flop of the betting/polling odds. Right now the polling shows 60% a Biden victory and 40% a Trump victory. One thing that has driven this is approval ratings; Trump was at 46% in April and now that has declined to the 39% range.
So what does that mean for the presidency?
It has been a long time since an incumbent has lost the race; the last time was George H.W. Bush in 1992. Going back 120 years there have only been 3 times an incumbent has won and 8 times an incumbent has lost when there has been a 20% decline in the market or a recession in the election year. We have had both this year. Since 1952, no incumbent has ever retained the White House when either of those have happened. Looking back, Truman had an approval rating of 39%, but the data suggests that most presidents are not re-elected with approval rating below 47%. Trump’s June approval rating was 38% and the approval rating is typically a good indicator of what the public vote will be.
Markets tend to like it when an incumbent Republican president gets re-elected. That is typically the best market performance. The next best performance is when an incumbent Democrat wins the election. On the other hand, markets typically don’t like it when an incumbent loses the election, especially when an incumbent Republican loses. However, the next year most of that decline reverses; it sells off 3 months following the new year and then subsequently recovers.
What matters the most is what happens in Congress. The Democrats need a net 3 seats to have a 50/50 in the Senate and then the new VP would be the tie breaker, which would give the democrats a 51/49 hold in the Senate. With a 51/49 Senate, the tax changes would be a hot topic. Trump lowered the corporate tax rate so the effective tax rate is around 18% right now and Biden currently has an effective tax rate of 28% on his agenda, and most of the research shops put an estimate of 4-13% hit to after-tax income (JP Morgan, Goldman Sachs, etc.). With narrow control of the Senate, coming off of a recession, and small businesses under pressure, we may see less of a tax increase than the stated 28%. Also keep in mind that the tax rate tends to come in at a lower margin than the stated rate. This could mean the earnings per share hit to S&P 500 companies could be less than the Draconian measure of 13% and could be 4-5%. Certainly not great for the equity markets, but if we start to see some rollback of the US/China tariff de-escalation, then that could also offset the effective higher corporate taxes.
The other item on the table is healthcare. Healthcare would likely be paid through higher corporate taxes. Higher capital gains and dividend tax rates are being discussed, as well as higher taxes on income over $400,000.
This is an ever-evolving and an ever-changing topic, so we look forward to providing another update on the election and its impact on the markets as we get new information and get closer to the election date.