“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.