The 2020 campaign season is ramping up quickly and many pundits and politicians are making bold pronouncements about what it could mean for the economy and the stock market.
None other than President Trump predicted in June 2019 that if he were to lose his re-election bid it would mean “a market crash the likes of which has not been seen before.”
Investors need to know the difference between facts and hyperbole during this election season so here are the actual implications for how the 2020 Presidential Election is likely to affect the economy and stock market in 2021 and beyond.
What If Trump Wins?
I should start out by saying that I’m an independent who never endorses candidates or tries to influence who you vote for. The job of a good analyst is to be as objective as possible and look at the facts. Then based on what’s most likely to happen in the future (rather than what we personally want to happen) make reasonable and prudent recommendations for readers that are most likely to make them money over time.
There is no question that small business confidence boomed following the election of Trump. That’s likely due to his penchant for deregulation and tax cuts. According to the Small Business Administration small businesses
- Account for 99.7% of US companies
- Generate 64% of new private US jobs
- Account for 49% of total US jobs
- Generate 46% of US GDP
The trade war has thus far not hurt small business confidence much because small businesses have less (though far from zero) exposure to international trade.
The biggest question during a second Trump administration is what would that mean for the trade war, which is the single biggest recession risk we face according to Moody’s.
Cowen policy analyst Chris Krueger believes that I think if he wins reelection next year, we’re going to see Trump totally unchained…He’s going to do [to Powell] what he did to Jeff Sessions.”
Trump replacing Powell would potentially worry about the market since the independence of the Fed is one of the cornerstones of our economy. But more concerning is that Trump might double down on his protectionist stance on trade.
The phase one trade deal that’s likely to be signed in January (according to China) is a good start to ending the trade conflict.
- 15% tariffs on $120 billion in goods that went up on September 1st drop to 7.5%
- 25% tariffs on $250 billion in intermediate imports stay the same
- December 15th’s 15% tariffs on $160 billion in consumer-facing imports canceled
However, ending the trade war entirely would likely require a three-phase deal that is going to require addressing intellectual property issues and non-tariff barriers that China has said it doesn’t want to change.
What’s more, Trump doesn’t trust the WTO, where he’s blocked new judges being empaneled to arbitration panels. A second Trump term might see the WTO become completely ineffective, meaning that future trade uncertainty might go up rather than down.
According to Monica de Bolle, a senior fellow at the Peterson Institute for International Economics
The China issue isn’t going away, and it’s not going to go away if we have another Trump presidency or if we have a Democrat…These are all issues that are going to be with us for the long haul.”
If Trump were re-elected it would have another important political/economic implication.
First, it means that the current deregulatory framework that small businesses love would remain intact.
Second, it means that the VP would remain Mike Pence, and here’s why that matters.
The current consensus Senate forecast is for the GOP to lose three seats, which means a 50/50 Senate. When the Senate is tied the VP becomes the tiebreaker. A second Trump term would likely mean the Senate remains under the control of the GOP.
The current House consensus is for a 4 seat Democratic majority, down from the current 14 seat majority.
In other words, if Trump wins then
- Long-term trade uncertainty could remain elevated for several years (especially due to the WTO being hamstrung by a lack of judge approvals)
- Congress remains deadlocked and no major regulatory changes occur
- Current deregulatory environment favored by small businesses remains in effect
- No major changes to tax code (corporate tax rate remains at 21%)
What If a Democrat Wins?
First, here’s an update on how the Democratic Primary Race is going, based on the most recent state primary polls of the five candidates that could realistically get delegates.
|% of Delegates In These States||54%||25%||15%||3%||1%|
|% Of Delegates Needed To Win Nomination||89%||41%||25%||5%||1%|
(Sources: Fivethirtyeight.com, RealClearPolitics)
There is a 15% cutoff to get any delegates, and 1,990 are needed to win the nomination on the first ballot. After that the Super Delegates, party insiders like Pelosi and Obama, will get to vote and they control 16% of the vote on subsequent ballots.
Right now it looks like Biden is on track to win the nomination on the first ballot. That has important economic ramifications.
On the positive side back in July Biden said this about the US/China trade conflict. President Trump may think he’s being tough on China. All that he’s delivered as a consequence of that is American farmers, manufacturers, and consumers losing and paying more…His economic decision-making is so shortsighted and as shortsighted as the rest of his foreign policy.”
Earlier Biden’s campaign manager hinted that Biden’s plan was to end the tariffs and use the WTO to address the very valid claims that both the US and our other trading partners have levied against China over the years.
Sanders and Warren (as well as Buttigieg and Yang) have all indicated during debates that they would likely continue the tariffs in order to maintain leverage against China. Sanders and Warren, in particular, appear as protectionist as Trump, but coming from the opposite side of the political spectrum, wanting to force China to impose stricter labor and environmental protections.
If Biden does indeed pursue a multi-lateral approach to trade, then that would likely reduce trade uncertainty significantly. But that doesn’t mean that a Biden administration would mean purely positive things for the economy or stock market.
That’s because Biden would likely reverse a lot of Trump’s deregulatory efforts which means small business confidence might fall back to 2016 levels. What’s more, he’s proposed a 28% corporate tax rate, 7% higher than it is now, but 7% below the pre-2018 tax cut levels.
What It Likely Means for Stocks
The important thing for investors to remember is that what politicians promise and what they can actually deliver are two very different things.
On trade, the US president has an effective blank check, thanks to the Trade Expansion act of 1962, which is what Trump has been using to wage his tariff war with China and various other countries.
Thus Biden could very much end the tariffs already in place, which would be a net positive for the economy.
The regulatory powers of the President are also significant, which means that a return to Obama administration levels of regulation could offset the benefits from ending the trade conflict, or at least shifting to a multi-lateral approach through the WTO.
What about the corporate tax rate rising to 28%? That would indeed have a major effect on the stock market because it would mean that corporate earnings in 2021 might fall by about 7% which would likely wipe out all the earnings growth for that year.
The good news is that passing that corporate tax increase, or any tax increase for that matter, would likely be VERY tough to pull off.
- Senate majority of 1 via VP tiebreaker = 10 short of a filibuster-proof majority
- Four vote majority in the House means no conservative Democrats from states such as Texas or NC could oppose that vote with it still passing
The Dow Under President Trump And Obama
The good news is that no matter who wins stocks are not likely to react significantly different over time, due to the trade-offs of each candidate canceling each other out and gridlock meaning that current tax rates are likely to remain in effect for at least two more years.
(Source: the balance.com)
As far as 2020 itself goes, with the exception of recession years, stocks almost always go up once the final winner is known (due to less uncertainty and because stocks go up 75% of all years).
With a 13-month recession risk at 25% right now, according to the bond market and Cleveland Fed, stocks are likely to end next year modestly higher or at least flattish. For context in early September, recession risk was 48%.
Bottom Line: Who Wins the White House Will Matter, But Sticking To Your Long-Term Strategy Remains Your Best Bet for Achieving Your Financial Goals
2020 is likely to have a larger fundamental economic impact than most presidential races, if only because trade is one policy area the President has virtually 100% control over.
Regulatory regimes are another and it’s likely that small businesses would be less enthusiastic about President Biden than President Trump.
Overall I expect that these significant policy differences between Trump and Biden to mostly cancel out which means that slim Congressional majorities will mean very little chance of major reforms taking place.
For example, Morningstar’s estimate of the probability of Medicare-For-All happening over the next 10 years is “5% or less”.
Market timing is the worst thing investors can do and making significant portfolio changes based on pundits predicting what stocks will do if one candidate or another wins an election is a form of timing that’s likely to represent a costly mistake.
A diversified and properly risk-managed portfolio designed for your particular risk profile, goals, time horizon, etc, is the best strategy for growing both your income and wealth over time.
These are the risk management guideline I use both for running my retirement portfolio as well as all the Dividend Kings’ portfolios.
Trusting in a prudent and time tested approach, rather than market timing which numerous studies prove is virtually impossible, is the best approach to take in virtually all economic, market and political environments.
SPY shares were trading at $325.86 per share on Thursday morning, up $1.41 (+0.43%). Year-to-date, SPY has gained 1.24%, versus a 1.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Adam Galas
Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...
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