How Will the Stock Market React to the Election?

Robert Brooks Contributor
How Will the Stock Market React to the Election?
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This is the top story from our daily newsletter published on August 26, 2020. To have this and more delivered directly to your inbox scroll down and enter your email or click here to sign up.


How Will the Stock Market React to the Election? Yesterday the S&P 500 rose to a new all-time high. After a coronavirus-driven sell-off in March the broad-based index has staged a historic comeback, officially surpassing its previous record set on February 19th. Accommodative fiscal and monetary policy, encouraging vaccine headlines, and outsized gains among mega-cap tech names have pushed stocks higher in recent months despite the fact that millions of Americans remain unemployed. Downdays and volatility are usually driven by tensions between the US and China, increasing coronavirus cases, disappointing economic data, or a combination of all three. As we inch closer to the election, a fresh wave of uncertainty could wash over Wall Street, especially if it’s a contentious result. Currently, Democratic presidential candidate Joe Biden is ahead in the polls, according to an average from RealClearPolitics. Additionally, Democrats may have a chance to take control of Congress. With that said, Trump is ahead in important battleground states like Georgia, Iowa, Texas, and North Carolina and could very well pull-off another “come-from-behind” victory along with securing the Senate. Below is a breakdown of how the stock market might react to the election, from a sector and policy standpoint:

Healthcare: Ever since Sen. Bernie Sanders dropped out of the presidential race, healthcare stocks have become less of a flashpoint. Sanders’ pledge to do away with private insurance, and his sporadic rise in the polls during the Democratic primaries caused shares of healthcare companies to plummet. With that said, “if Democrats succeed in taking both the Senate and the White House, they could revive ambitious efforts to remake the health-care system that would negatively affect the prices of health-care stocks,” Josh Nathan-Kazis writes for Barrons. “Divided government, on the other hand, would rule out big legislation, and could set up health stocks to climb. Raymond James analyst Chris Meekins says that the health-care sector would outperform the market if Biden wins the presidency and the Republicans keep the Senate.” Conversely, Meekins says a Trump victory would mean little change despite loud talk on drug pricing. “We may continue to hear rhetoric, but we’re not convinced you will see substantive action that negatively impacts earnings.”

Technology: Mega-cap technology stocks continue to push major US stock markets higher. Last week, the collective market capitalization of Apple, Amazon, Microsoft, Google owner Alphabet, and Facebook surpassed $7 trillion. Adding Tesla and Netflix to this list pushed the valuation to $7.7 trillion. According to one analyst, however, a Joe Biden win could undercut the market leaders. When it comes to regulation of the tech industry, Biden “is seen as more moderate…than some of his challengers for the Democratic nomination would have been, but he has previously stressed the need for greater focus on antitrust enforcement, and heightened regulatory uncertainty could weigh on the sector’s elevated valuation multiples,” wrote Daniel Grosvenor, director of equity strategy at Oxford Economics. President Trump is harder to read when it comes to big tech. He has threatened to use executive orders to “bring fairness” to the tech industry, if Congress didn’t do it. At the same time he’s initiated punitive measures against Chinese firms, such as TikTok, that have helped US companies like Facebook. Trump’s low-tax, less-regulation platform probably benefits tech firms like it does with the next sector below.

Financials: A Biden win and Congressional takeover would likely send financial shares, especially banks, lower. In general, a “blue-wave” would lead to more regulation, which would hamper profitability. This regulatory push would potentially be driven by Sen. Elizabeth Warren who is widely viewed as a potential Treasury secretary in a Biden administration. Put simply, Wall Street is no fan of Elizabeth Warren. A Trump victory would likely mean status-quo, which could marginally help financial firms and shares of their companies.

Energy: One of the core components of Biden’s platform is tackling climate change and as a result directing the US towards more renewable energy sources. In July, Biden released a four year, $2 trillion plan that includes some lofty goals — including achieving a 100 percent clean electricity standard by 2035. Given the fact that more subsidies would be granted for clean energy there would be a financial incentive to invest in these rather than fossil fuels. Legacy oil and gas producers would likely come under pressure under a Biden controlled White House. Conversely, a Trump victory would likely mean the continuation of deregulation in the energy space as evidenced by his administration’s decision to open up the Arctic National Wildlife Refuge last Monday.

China: While Joe Biden claims that he would remain “tough on China,” Wall Street generally thinks a Biden administration would be more open to Beijing. Biden had been an “engagement” proponent in the Obama administration, Tanner Brown writes for Barron’s, and Kamala Harris echoed this sentiment recently. “It’s a complicated relationship,” Harris believes. “They steal our products, including our intellectual property. They dump substandard products into our economy. They need to be held accountable. We also need to partner with China, on climate and the crisis that presents. We have to partner on the issue of North Korea.” In summary, while a Biden-Harris ticket might be tougher than the Obama-Biden days, the two might be less willing to use tariffs as freely as Trump. This could actually be perceived as a positive on Wall Street, but it could come back to bite Biden from a political perspective. The proportion of Americans holding unfavorable views of China reached 73%, according to a Pew Research Center poll released in July, therefore too “open” of a relationship with Beijing could come back to hurt Biden at the polls.

Fiscal Stimulus: Both Biden and Trump are in favor of more fiscal stimulus for the economy, especially in light of the coronavirus. Prior to the coronavirus, and prior to Donald Trump, Republicans would have generally preferred to rein in spending, but as we mentioned yesterday, Donald Trump has had a profound impact on the party. Wall Street also believes that current circumstances call for more spending, therefore no matter who wins, anytime the Fed or Congress steps into help, investors will applaud the actions.

Minimum wage: A Biden-Harris ticket would raise the minimum wage to $15 per hour. In normal times, this increased cost may send shares of companies like restaurants, hotels, and retail outlets lower, however these are not normal times. Between job losses and some people being hesitant to shop in-stores, consumer spending tanked in the second quarter. Therefore, take a retailer like Gap for example. If the company’s bottom line is impacted by higher minimum wages, but more people are spending money in their stores as a result of the pay-bump, it could be a wash. Again, a Trump victory representing less regulation and lower taxes will probably lead to marginal near-term gains as it would represent a continuation of the status quo.

Flag This: So much more goes into this type of analysis, but we think these are the major takeaways. None of this should be perceived as a research report, this is just a comparison of priorities and policies depending on which candidate wins. A Democratic sweep could have the largest impact on the markets, whereas a Trump victory will likely coincide with further developments on the vaccine front which will push shares higher. At that point their might be a rotation out of defensive tech-names, which investors have piled into this year as mentioned above. Companies that could benefit from a full-economic reopening and rebound in 2021 could rise higher which would help airlines, casino operators, and cruise companies. Of course, all of this is just conjecture and NASA says an asteroid is headed our way right before Election Day anyway. At that point this comparison would take a back seat to larger issues.

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