The US Democratic Party’s agenda includes higher corporation tax, higher minimum wages, and more regulation. Should investors be concerned?
Former Vice President Joe Biden’s odds of being elected President on 3 November have shortened considerably recently. To bet on him on Predictit, an experimental political betting site run by academics and often quoted in the media, you’d have to pay 60 cents on the dollar, up from 52 cents at the beginning of June.
Pollsters are also registering the shift of opinion, some quite markedly. However, the Gallup poll, our preferred measure, thanks to its long history and therefore testability, showed Trump’s approval rating dropping at the end of May, but not beyond his past range. If it stayed here it would be consistent with a loss. But it could rebound if civil rights are relegated from the voters’ agendas as, distressingly, they often are. His approval rating hit a personal best in early May, before the deterioration in race relations, around the same level as President Obama’s was five months before his 2012 re-election.
Pollsters and bookies have been wrong before. We view US elections as referenda on the incumbent President and his party’s record on the economy, and Trump’s prospects are now inextricably linked to the highly uncertain outlook for employment. If a very large proportion of temporarily laid off workers are re-employed, Trump’s chances, according to this econometric framework at least, are still good. If unemployment remains high, Biden is likely to take office.
If Mr Biden were to win, the market reaction will be determined by whether the Democrats take the Senate, and his choice for running mate. Biden is from the centrist wing of his party — he’s no Bernie Sanders. But a progressive (read, socialist) choice would likely unnerve markets. A fellow member of the Democratic establishment, such as Kamala Harris, would likely temper the market reaction to his victory. The vice president matters more this time because at 78 Biden would be the oldest US president by quite some margin. According to the New York Times, Mr Biden’s aides have said his choice for running mate will be announced next week.
The bipartisan Tax Policy Center suggests Biden will raise $4 trillion in taxes over 10 years, in part by increasing the corporate tax rate to 28%. That’s still 7% below where it was in 2016 but could shave around 5% from the earnings per share of the S&P 500 index. Biden’s expenditure plan is harder to tally but given his plans have been described as “more ambitious than FDR’s”, expenditure is likely to exceed taxation. He also wants to double the minimum wage, and change regulation to make union organisation easier.
All told, Biden’s plans are likely to increase aggregate demand (corporations and wealthy households have a lower propensity to spend income than the average worker) but decrease the corporate sector’s share of the pie, which could be net-negative for profits. But investors should remember that his redistributive agenda won’t make it into law if the Democrats don’t control both chambers in the Capitol. To do that they need to win all four “swing seats” currently held by Republicans in the Senate. That’s a tall order. Concerned investors need to multiply Biden’s odds by the odds of the Democrats winning the Senate (given a Biden victory).
Three months is a long time in politics. And in markets, especially with today’s uncertain outlook. We note that US equities have only posted above-average returns in the four months leading up to just two of eight elections since 1988. We think investors should remain broadly invested, but with some good defences against uncertainty.