As we are getting closer to the U.S. presidential election, investors try to understand what the implications of a Biden win will be on USD and stocks. The 2020 Presidential elections are unique as the USA is facing the biggest economic crisis since the 2009 financial crisis, and in that, no past election year has included an impeachment. The November election also arrives as the unemployment rate hit record highs, and amid violent protests after the death of George Floyd.
In 2020 it will be the 59th U.S. presidential election and is scheduled for Tuesday, November 3, 2020.
Will Joe Biden or Donald Trump will be better for stocks? What will be the implications on the economy and the USD if Joe Biden wins? Let’s have a closer look at what might happen to the economy if Joe Biden wins the election.
Who is Joe Biden
Joe Biden is the former vice president, and the Democratic party nominee, born in Scranton, Pennsylvania, in 1942, is the son of Catherine Finnegan Biden and Joseph Biden, the first of four children. When Joe was 10, the family moved to Claymont, Delaware, to look for better work. Delaware becomes the state Joe Biden calls home. As a politician, Joe Biden has maintained close political ties to both states.
Joe Biden studied history and political science at the University of Delaware and earned his law degree from Syracuse University. At age 29, Biden becomes one of the youngest people ever elected to the United States Senate. He was re-elected six times and was the fourth-most senior Senator when he resigned to assume the vice presidency in 2009.
Joe Biden called for action to address the climate change before it was a mainstream issue, introducing the Global Climate Protection Act (GCPA). He was the Chair of the Foreign Relations Committee and organized several rallies to support resolutions on climate change, in an attempt to build momentum for action to address climate change.
As Obama’s vice president, he was responsible for infrastructure spending to counteract the Great Recession. Biden also helped formulate the U.S. policy toward Iraq and the withdrawal of U.S. troops in 2011. During the Obama administration passed critical legislation such as the Tax Relief, the Job Creation Act of 2010 and the Taxpayer Relief Act, which addressed the fiscal cliff.
President Obama awarded Joe Biden the Presidential Medal of Freedom with Distinction, the U.S.A highest civilian honour.
After leaving the White House, Joe Biden returned to Delaware. He created the Biden Foundation, the Penn Biden Center for Diplomacy and Global Engagement, the Biden Cancer Initiative, and the Biden Institute at the University of Delaware.
Biden’s Running Mate
Kamala Harris, the California Senator, widely considered a moderate Democrat will be the presidential candidate as Joe Biden’s running mate. Harris is the first South Asian American and black woman in this role.
Joe Biden’s selection of Harris, adds racial diversity, gender parity and generational breadth to his campaign. It also represents a strategic decision by Biden to keep his ticket firmly within the more moderate wing of the Democratic Party.
As a presidential candidate for the Democrats, Kamala Harris did not support breaking up the big tech companies such as Amazon.com, Facebook and Alphabet as the other Democratic Presidential did, but instead was supporting the antitrust enforcement. Harris argues that tech companies need to be regulated in a way that citizens’ privacy is not compromised.
Kamala Harris, like Joe Biden, is an advocate for higher corporate taxes but she is against a tax on assets held by the richest Americans. Analysts believe, with Harris as a candidate, and not Bernie Sanders or Elizabeth Warren, tech donors are ready to add more support to Biden’s ticket. Tech companies were looking for someone who won’t break up Big Tech but does believe antitrust regulations needs to be voted.
It looks like that a Biden-Harris administration is unlikely to drastically change business as usual when it comes to the financial industry and Wall Street. Financial markets want stability, and Biden can assure that. Wall Street is happy as they avoided, Warren and Sanders who have advocated Medicare for All policies and looking for significant reforms in the Street including breaking up the big banks.
Biden Win: Here is what it would mean for USD
The U.S. Dollar has benefitted from President Trump’s economic policy of trade protectionism. On the other hand, Biden has been a longtime supporter of international free trade and a strong critic of trade tariffs, arguing that the USA should be responsible on creating global trade rules and lowering barriers to global trade. Analysts expect that Joe Biden will impose less aggressive protectionist policies against China and especially against the U.K. and Europe.
Democrats and Joe Biden support the idea for higher taxes and would probably increase the corporate tax rates back up to 28%. Higher taxes might hurt U.S. economic growth, and that might push pressure on the greenback while extra fiscal stimulus measures to fight the historic high unemployment rates due to coronavirus crisis might also pressure USD.
Biden supports the North American Free Trade Agreement and believes that the USA should treat other countries in a way they treat USA.
Analysts also expect that Joe Biden will give more room to Fed and will avoid interventions. He has avoided commenting on the exchange rate, and I believe he would stick to this script if elected. We can recall many times the last year that President Trump called the Fed to lower interest rates and ease the monetary policy further.
President Trump was against a strong dollar during his Presidency and pressured Fed to that direction, but the last month in a surprising move said that he supports a strong dollar.
Joe Biden and Wall Street
We can say that Wall Street still prefer Trump over Biden for President, but if a Democrat is going to be the next U.S. President, Wall Street could live with Biden. Joe Biden, a longtime senator from Delaware, a state that is home to major credit card companies, so Biden is seen as more moderate. Biden’s relationship with Wall Street reflects the role of that industry in Delaware – the state Biden represented as Senator from 1973 to 2009.
Delaware is the home for large corporations and many financial services companies. Delaware State has almost 1.4 million businesses incorporated. More than half of publicly traded companies in NYSE and Nasdaq and more than 67% of the Fortune 500 companies are incorporated in Delaware.
In his political career, Biden has promoted himself as supporting the middle-class workers and small businessman who populate the Main Street against the bankers, brokers and corporate executives who inhabit Wall Street.
Biden has made significant steps in approaching Wall Street. Biden helped banks and financial companies in their consolidation efforts. In 1994, Biden endorsed the Riegle-Neal Interstate Banking and Branching Efficiency Act that erases the remaining barriers to interstate banking. This opened the doors to a new wave of corporate consolidation of the banking and financial industry.
In his current presidential campaign, stockbrokers, bond dealers and brokerage houses have donated $29 million to the campaign according to numbers from the Center for Responsive Politics. On the other hand, President Trump has received about $6 million from the same group.
Joe Biden has received more donations from employees of JP Morgan Chase, Morgan Stanley, Bank of America, and Goldman Sachs than Donald Trump.
Biden and The Tax Reform Act
Analysts believe that Biden would put in jeopardy the Trump’s 2017 Tax Reform Act. There are discussions that certainly the Democrats would like to repeal that legislation and bring the corporate tax rates back up to 28% or 29%. A higher corporate tax would challenge margins and earnings growth in an environment where it’s already tested during the coronavirus crisis. Wall Street bet that Trump would extend his tax cuts if he wins a second term, which supports corporate profits and stocks market in a coronavirus battered Wall Street.
The Tax Reform Act helped buybacks at S&P 500 firms, which increased by 55% to $806.4 billion in 2018, the year the reduced tax took effect. S&P 500 public companies repurchased another $728.7 billion of stock in 2019. The buybacks helped S&P 500 to rise above the 3,000 mark. The lower effective corporate tax rates have accounted for almost 50% of the S&P 500’s increased profit margin and 24% of earnings growth.
Biden’s tax plan would eat into corporate profits. And that would be a negative for the coronavirus battered stock market, which has been betting earnings will rebound sharply in 2021.
Analyst’s estimate that combined with an expected drag on GDP, (a contraction of 5% according to FED) higher corporate tax would lower 2021 S&P 500 EPS by $20 to $150.
Biden is also planning to impose a minimum tax rate of 15%, which will be costly for some major companies in Wall Street that pay little or no taxes.
Amazon in 2017 and 2018 didn’t pay any taxes while in 2019, Amazon is set to pay about $1 billion in federal income tax, a figure that is just over 1% of its profits.
It is evident that the companies that benefited the most from Trump’s 2017 corporate tax cuts would be vulnerable to new higher taxes. Netflix’s effective tax rate was just 7% in 2018, compared with 8% the year before. Under Armour paid a tax rate of 23% in 2018, down from 39% the prior year. Boeing, United Airlines and other airlines also enjoyed sharp drops in tax rates.
Which Stocks Will Benefit the Most from Biden?
Despite the tax implications, Biden’s approach will not be against investors as some parts of the Joe Biden agenda could be greeted with relief from Wall Street.
Biden is less likely to impose new tariffs on trading partners such as China than Trump. The trade tensions between China and the USA created much of the uncertainty during 2019 and in the first months of 2020.
Also, a Biden win could raise the chances of passing the infrastructure package that could boost the coronavirus battered U.S. economy. Trump tax cuts would likely stay intact unless the Democrats retake the Senate, too. Trump administration is also discussing a one trillion reconstruction package in the last weeks.
Wall Street believes that health care companies such as Anthem, Centene, UnitedHealth, Humana, and CVS Health will capitalize on Joe Biden win. Biden proposed health care plan would build off the current Affordable Care Act (Obamacare). That means that health care companies will likely be able to keep their existing business models and increase profitability.
In general Wall Street prefers Republicans but history shows that Wall Street did also well when Democrats like Bill Clinton and Barack Obama were in the White House. What investors typically loves more, is that when there is a split power among the two parties in Washington. That’s the case now, as Democrats have control of the House while the Republicans hold a slim majority in the Senate.
In recent polls, Biden is leading with a 56% chance of winning the Presidency up from just 43% a month ago. The prospect of the Democrats controlling the Senate has climbed to 56% in recent polls.
Recent surveys find that 36% of American citizens believe that Donald Trump would be better for their finances, while 35% believe that would be better with Joe Biden. The surveys come in as many Americans are pressured due to the coronavirus crisis, with many not optimistic that their financial situation would improve by the end of the year.
Four months ago, with a strong economy and Wall Street making consecutive record highs, it was almost inevitable that Trump will win a second term. Now, after the coronavirus crisis and a double-digit unemployment rate and a deep recession, Trump faces a defeat, and he might even take down GOP Senate control with him.
I believe that the markets are not pricing in a Trump reelection or Biden’s win yet as they mostly focus on the coronavirus impact on the real economy. Analysts and investors believe that is it too early to take positions betting on the outcome of the election. Wall Street doesn’t like surprises and changes, so if Biden takes the elections, investors might be more cautious.
A Biden win might have a negative impact on the stock market if he imposes higher taxes to the most profitable companies and rich people, and higher wages. However, in the long-run, the economy would benefit from higher salaries and equal distribution of income because low and middle-income families spend a more significant portion of their wages than the very rich do, so more money would recycle in the real economy. Higher taxes mean that the federal government might spend more to build infrastructure and to restructure health care, and education to make them more affordable to all citizens. The infrastructure spending will recycle the money back to the U.S. corporations improving their profits.