Maybe Biden Wouldn’t Be So Bad: Markets Begin To Ponder Trump Exit

“Biden won’t be that bad for markets”, Vital Knowledge founder Adam Crisafulli writes, in a note making the rounds to start the week.

I find it amusing that it’s taken folks so long to come to the self-evident conclusion that an administration run by a Beltway wall fixture can’t possibly be all bad for US stocks.

Early last month, in a fairly popular piece provocatively called “There Can Be No Change“, I reminded market participants (and voters) that one year ago, while speaking to rich donors at the Carlyle Hotel, Biden made the following promise:

The truth of the matter is, you all know in your gut what has to be done. We can disagree in the margins but the truth of the matter is it’s all within our wheelhouse and nobody has to be punished. No one’s standard of living will change, nothing would fundamentally change.

In the same linked piece, I marveled at how ludicrous it is that some Americans have been duped into believing that Biden represents the “radical left”. You needn’t be a student of US political history to know better. All you need to do is watch a few highlight reels from the Democratic debates.

When it briefly looked as though Bernie Sanders had the nomination locked up, market participants were understandably concerned. I use the term “understandably” not because I personally believe Sanders’s policies are a one-way ticket to Caracas, but rather because his professed aversion to corporate greed doesn’t line up particularly well with a backdrop defined by lower corporate taxes and perverse incentives. That’s a euphemistic way of saying that had Sanders won the nomination and then bested Trump, stocks would have surely repriced lower, at least initially.

But it is by no means clear why a prospective Biden presidency should keep investors awake at night. It’s true that a partial rollback of the Trump tax cuts would eat into earnings. The figure (below) shows Goldman’s estimate, for example.

$20 off the top (or, actually, off the bottom) is “not nothin'”, so to speak, but that estimate assumes all else is equal. It doesn’t take into account the myriad possible mitigating factors, not least of which is the assumed wind down of Trump’s multi-front trade conflict.

JPMorgan’s Marko Kolanovic has long argued that a Biden victory wouldn’t necessarily be a net negative for stocks. “In addition to the direct negative impact of tariffs on corporate earnings and specific segments such as farming and manufacturing, there is a larger negative impact from uncertainty and volatility introduced by the policies”, he wrote in December.

That uncertainty, Marko said, “is equal to or larger than the benefit of corporate tax cuts to the equity market”.

The read-through for a centrist Democrat is that as long as taxes aren’t increased beyond what they were during the Obama-Biden years, “the effect on the equity market would likely be a net positive”, Kolanovic went on to suggest.

In a new note, JPMorgan’s Dubravko Lakos-Bujas expresses similar sentiments. “The consensus view is that a Democrat victory in November will be a negative for equities [but] we see this outcome as neutral to a slight positive”, he says. The chart (below) is similar to the visual above, but uses JPMorgan’s figures and includes estimates for a deescalation of the trade conflict.

Not everyone agrees that Biden would meaningfully calm tensions with Beijing. “On the micro side, for those who identified a Biden win as market bullish, they appear to have premised this on the notion that Biden would dampen tensions with China”, Morgan Stanley wrote, in a sweeping election update out last month. “We disagree with this notion”.

The bank went on to say that US-China tensions are “becoming more constant than variable”. When asked by clients which election outcome leads to a de-escalation of tensions with China and/or a reversal in the ‘slowbalization’ dynamic?”, the bank’s answer is “none”.

Below is Morgan’s scenario analysis complete with policy implications.

It’s also worth noting that attempting to quantify the election impact on earnings at a time when the outlook for corporate profits is as uncertain as it’s ever been (thanks to the pandemic) may be an exercise in futility. Who’s to say that a Democratic sweep accompanied by more aggressive stimulus aimed at lower- and middle-income Americans with a higher marginal propensity to consume wouldn’t end up being a boon to the consumer-driven economy and thereby to corporate profits? Why would anyone believe that supply-side policies would work at a time when corporates are inclined to hoard cash? Etc.

Morgan touches on that as well. “On the macro side, the misread is likely to be around the trajectory for growth and inflation”, the bank says, adding the following:

It’s true that Biden is proposing meaningful tax increases, but one should not assume that this is either possible or would be sufficient to create a fiscal contraction. Rather, the net policy result of a Blue sweep in our view is a demand-side stimulus, which our economists argue could have a meaningful multiplier effect. Hence, the read in macro markets should, in our view, be toward higher rates and steeper inflation curves.

The irony, of course, is that if a Biden presidency turned out to be a net positive for the equity market, it would only prove the overarching point from the first linked post above — namely that Biden only represents “change” by contrast to Donald Trump. By any other political yardstick, he would be the very definition of “status quo”, a characterization he worked hard to perpetuate during the primaries.

For what it’s worth, Trump’s odds have collapsed in betting markets.

“For the last several months investors watched Biden’s rising poll momentum with trepidation, but now a narrative is emerging whereby he’s being painted as a neutral (and possible upside surprise) for stocks (as taxes won’t rise by as much as feared while trade policy should be less disruptive and the volume of nonsense tweets will be substantially reduced)”, the above-mentioned Crisafulli remarked.

As if on cue, Trump warned that should Americans elect Biden, 401k’s (and stocks in general) will “disintegrate and disappear”.

“Vote for the Radical Left Do Nothing Democrats and Corrupt Joe Biden”, the president tweeted, daring Americans to defy him. “They will make you very poor, FAST!”, he added.


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10 thoughts on “Maybe Biden Wouldn’t Be So Bad: Markets Begin To Ponder Trump Exit

  1. A Biden victory postpones, at least overtly, our slip into Fascism. Save for the Fed fire-hosing buckets of money on the rich and famous, the market should be hammered no matter who wins. Now enter Kanye West. Surreal.

  2. I wonder if Trumps Tweets will continue unabated … the only difference being that no one bothers to listen.

    1. I’m afraid the man will do all he can to “burn the house down” over the next few months if Biden’s support grows. There are still a lot of people–too many for that matter–that will listen. At least all of the demonstrations we have seen the past month have been relatively peaceful…don’t count on that when the other side takes to the streets should Trump lose.

  3. If we make serious progress to a balanced monetary/fiscal policy set that achieve some significant improvement in fairness, markets will likely drop but GDP strengthen. If not, we’re getting very close to “off with their heads.” This quarter we’re looking at a 35% drop in GDP. I fully expect to see headlines for 3Q20 trumpeting “the largest GDP Growth increase in history”, with no mention that we’re still well in the hole. In fact, we’ll be very close to a Great Depression Economy, with the significant difference that there are 100 million guns floating around the country. Most of those guns are not in the hands of the rich. Besides, how many more guns can a rich person carry than a poor person?

    1. At this point I think a change in party power is the least of anyone’s concerns. The United States is still in phase one of Covid-19 per Fauci and the economic risks from the mishandling of our pandemic far outweigh anything happening politically.

  4. I’m becoming very weary of the hand wringing over the negative market impact of a Biden/Dem win. With all the problems America has, now laid bare by the pandemic and the murders of George Floyd and many others, if the primary concern is stock market impact, then we truly have far greater problems – we are no longer a society worthy of the hope and admiration of the world. America was made great in the 20th century with generally far higher tax rates.

    The US is currently closed for repairs. Let’s hope we find the wisdom to take the right steps to make the needed repairs so that life is actually better for everyone. Our investment accounts will be just fine.

    1. Agreed. Can you believe we are debating if it would be a positive to get rid of a narcissistic demagogue out of the white house who cannot lead, (or read?) takes no responsibility, and it really just a big buffoon?

  5. I think your article nails the key point on the market impact of a potential Biden win or Democratic sweep, even if some corporate taxes are rolled back there would be a clearer path towards a more aggressive fiscal policy and perhaps the return of inflation, the rarest of unicorns.

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