It seems everyone is speculating on which will be better for the U.S. stock market: the re-election of President Donald Trump or the election of former Vice President Joe Biden to the Presidency. While opinions can be heated and often driven by one’s political predilections, in reality, the outcome of the election may not matter all that much to the markets.
Both candidates have presented their economic visions for the future, and both have received positive reviews on their plans. For those willing to hear a few positive things about the ‘other’ candidate, here are a few points on why each candidate can potentially help the stock market move higher in 2021 and beyond:
Donald Trump can be viewed as more favorable because:
The Tax Cut and Jobs Act of 2017 will remain intact under Trump. The Act lowered corporate income taxes to a maximum of 21%, making U.S. corporations more competitive on the global stage. The Act also allowed more certainty for planning and capital investment. For individuals, taxes on dividends and capital gains were unchanged and remained at rates favorable to ordinary income rates.
Under Trump, the favorable regulatory scheme of the past few years will continue. Reduced regulations mean lower costs for corporations, which can contribute to higher corporate earnings; as earnings ultimately are the biggest driver of stock prices, this may be favorable for the overall stock market.
Trump is less likely to institute widespread COVID-19 shutdowns. While we wait for a viable, widely administered vaccine, and despite the apparent medical benefits of a more cautious health policy for COVID-19, the President has demonstrated that he is more inclined to reopen commerce and keep more activities open. This could have a positive impact on the economy.
Joe Biden can be viewed as more favorable because:
Biden may present less uncertainty and fewer conflicting messages. One hallmark of the Obama–Biden administration was that they stayed on point. Messaging was crisp and consistent. If Biden is elected, many of those same administrative officials will serve prominent roles. Business generally dislikes uncertainty and may welcome the end of Trump’s daily, impulsive, and often divisive tweets that do not enhance market clarity.
Biden may offer a more favorable policy towards China. To be sure China has been shown to be an economic threat and a violator of human rights, but the reality is they are the world’s second largest economy. As such, we have a relationship of mutual need, and Biden has historically been a bigger fan of China than Trump, who seems to relish threatening China with tariffs and using them as a political prop.
A Biden presidency presumes more government spending. A Biden administration will push hard for spending on infrastructure, state and local government support, green energy programs, and other large-scale government initiatives. At least in the short run, this will stimulate the economy. A Biden administration will be more likely to work with the House of Representatives, where revenue bills start, and where Speaker Nancy Pelosi, who is clearly not a fan of Donald Trump, rules with an iron fist.
If the Presidency and the Congress are split Republican and Democrat:
A reasonably likely outcome of the election is that the Senate remains Republican and the Presidency goes to Biden; or President Trump retains the Presidency, but Republicans lose the Senate. In either of these scenarios where the House, the Senate, and the Presidency are not run by the same party, the market will likely react favorably.
While it may appear more dysfunctional when we have divided government, in some ways it reflects what the Founding Fathers wanted: robust debate and diverse views on policy. And, at least in recent history, divided government has delivered strong market performance. See the results of Bill Clinton and Newt Gingrich in the 1990’s, or Ronald Reagan and Tip O’Neil in the 1980s, or even George W. Bush and Nancy Pelosi in the 2000s—until of course the housing bubble caused a massive stock plunge.
The debate season is upon us and the rhetoric will heat up. Just keep in mind that both candidates and both political parties can boast strong track records and powerful economic arguments. In the end, Wall Street looks beyond who is in the White House—but it sure is interesting to play the parlor game.
