I had a meeting with a long time client of mine this week and she asked me if we should be worried about the US election and who would become President. This is a common question on investors’ minds especially as a couple of debates between the candidates were aired last week. I told her that I could argue a positive case for Biden and I could argue a negative case for Biden. I could also argue a positive case for Trump, or I could argue a negative case for Trump. In other words… I have no idea what the election will do for markets!
In 2016, the consensus view was that the markets wanted Hillary Clinton to win. In addition the consensus among pollsters was that she would win. We all know what happened with the election but people might forget that on the night of the election, futures for the Dow Jones Industrial Average dropped over 1000 points overnight at one point and were still down sharply at the open the following day when it was clear that Donald Trump was going to be the next President. Those who sold that morning didn’t have to wait long to regret it though as the market later turned positive that day and the 4th quarter of 2016 produced a very strong bull run which sent markets to what was then all time highs.
So essentially, the consensus view was not only wrong on who would win the election but also what impact that would have on markets. If you based your investments on the consensus view, as many people did, you were likely very unhappy.
Let’s look at the candidates objectively and try and build a case for them.
Joe Biden is widely seen as a moderate in the Democratic party, but it is clear that the more socialist elements of the Democratic party have gained more influence over the past 4 years. So how the Democrats would govern is a little bit unclear, but I think we can assume that Biden wouldn’t deviate too much from his centrist past. He’s promised to reverse the Trump tax cuts and move the corporate tax rate in the US back to 28%. This is unquestionably bad if you are a shareholder of one of these corporations as it means that there will be more money going to the government which means less money available for you. This could certainly be bad for markets. It also appears likely that Biden will raise taxes on the ultra affluent. These wealthiest of Americans almost by definition own a great deal of stocks. If they are forced to pay more in taxes, that is going to reduce their demand for purchasing stocks, because they simply won’t have as much money available to do so. That would also be negative for stocks. There is also the chill effect that higher taxes have on investment. When you get taxed more, it makes less businesses viable, which means generally the economy will not grow as fast and job creation will probably be slower. This is also bad for the economy and bad for markets.
On the other hand, Biden has promised to invest heavily in infrastructure and in particular green energy. This could be a very positive boon for American industry which could have positive spin off impacts on other parts of the economy. Even the most ardent capitalist must concede that business is dependent on government provided infrastructure like transportation, power, water, and other utility networks. Even if your utility provider is private, they likely function in a highly regulated environment where the government has a lot of impact on that industry. In our modern world, Internet access is a crucial element to any business, and often times this infrastructure requires a lot of government support and regulation to be viable. Many people forget that the internet itself was borne out of a government research program. I think a targeted infrastructure program could provide huge benefits for years to come. Execution will be the key on this. There is also the possibility that under a Biden administration that trade relations will be a lot more predictable. This could provide reassurance to markets which have often bounced around based on every tweet from Donald Trump.
Donald Trump’s obvious flaws often overshadow the good things that his administration has done to improve the economy since being elected in 2016. One of the unheralded things their administration has done is to cut regulations and red tape on American business. Not all regulation is bad of course, but governments tend to over-regulate. To a man with a hammer, every problem is a nail, and the government’s hammer is slapping a regulation on every problem. This often leads to over-regulation and a serious drag on the economy. The current administration has made it a policy to remove regulations and I think this did have a positive effect on job creation. We can also safely say that the corporate tax cuts that were made during Trump’s first term were stimulative to economic growth and job creation, though they may have created an increasingly worse fiscal deficit (even before COVID) which could lead to problems down the road.
But speaking of flaws, there is also a negative case for Trump on the economy. Trump’s trade disputes have been a disaster. They’ve been highly disruptive with little benefit to Americans. Picking fights with Canada and European countries is not a very productive exercise. With China there are some valid grievances which need to be addressed. But the unilateral way the Trump administration has approached China has resulted in a divided opposition to China and little concrete progress. Since China has now handled the pandemic a lot better than the US, they are emerging from the pandemic in a stronger position then ever before. I think Biden will be more effective in marshalling allies to help apply leverage on China, and that should allow for more pressure to be applied to China and hopefully more favourable movement on issues of common interest, such as protections for intellectual property and security of private information. Another advantage I think Biden brings is his respect for institutions, both inside and outside of the economic world. It’s easy to criticize the Federal Reserve and other central banks for mistakes they make. But I definitely think that having an independent central bank is better then one beholden to the president. With many of his comments over the past 4 years, Trump has blurred the lines of independence a bit, and I think that is unquestionably a bad thing.
In the end, we really don’t know what the impact will be with one president over another. We can guess, but there is a good chance that our guess will be wrong. One thing that is also true is that it may not even be that important to you, depending on what you’re invested in, and what your time horizon is. Over the long term, presidents actually don’t have that much influence on the great businesses we like to invest in. Berkshire Hathaway has been a great company for 50 years under both Democratic and Republican presidents, and it will continue to be a great company regardless of who is elected in November. Since we can’t really predict what will happen in the election, it’s a good thing that we don’t really need to in order to invest successfully. If you’re investing in a good business, the politics likely won’t matter much in the end.
- Craig White, BA, LL.B., CIM®
Craig White is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.