Now that domestic COVID infection rates are falling, the country is beginning to reopen, and market volatility has subsided, it’s time to look ahead at what will most likely fill the media headlines in the second half of 2020: The Presidential election.
The stock market is surprisingly President-agnostic over the long term. Whether it is a Democrat or Republican, the President does not have too much direct effect on the stock market and companies learn to adapt quickly to the current regime. But this does not mean that the President does not have any influence over market factors. Presumptive Democratic nominee Joe Biden is much more centric than former liberal contenders Bernie Sanders and Elizabeth Warren, but he still shares some of the same policy directives such as the push for a return to the more progressive tax policies of the Obama administration. Biden has proposed partially reversing the Tax Cuts and Jobs Act (TCJA) passed by the Trump administration in 2017. This tax package in our opinion was a huge boost for American corporations not only because of the increased annual cash flow to the bottom line, but also the competitive dynamic compared to foreign nation’s tax rates. If the Biden Administration were to repeal this tax code it would be a headwind to American businesses. In a note put out over the weekend, Goldman Sachs illustrated how aspects of the TCJA being repealed would potentially affect large-cap companies bottom lines. Goldman’s Baseline forecast for 2021 earnings is slightly higher than consensus EPS estimates but their tax code revisions lowers them to in line with other forecasts.
The electoral race is close and still too early to predict. In the last week Former Vice President Biden has overtaken President Trump as the favorite to win the presidency in 2020 for the first time this election cycle. It’s also important to keep in mind that passing impactful legislation is incredibly complicated even if one party controls the White House and both Houses of Congress. This was displayed when the Trump administration fought to initially pass the revamped tax code in 2017. As election season begins to heat up, be prepared for a barrage of noise related to presidential race potential impacts to the market. We will be monitoring this potential market volatility with a view of capitalizing on opportunities.
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