How this election could impact markets

By the Global Economics and Investment Analysis team at BNY Mellon Investment Management

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September 28, 2020
 
November’s US Presidential election is set to be one of high stakes, polarized viewpoints and an unprecedented mass mail-in voting process due to social distancing measures. Many expect polls to narrow over coming weeks, which is likely to bring uncertainty to markets up to Election Day, and possibly beyond, in the case of an unknown outcome.

Historically, when a party change in the White House is expected, the S&P 500 shows weakness through September and October 1, and we believe this season will be no exception. However, the main factor driving market sentiment through fall is the path of COVID-19 and the expected timing of a vaccine. If we avoid an unmanageable second wave of the virus, market participants will likely focus more closely on hot button topics of taxes, law enforcement, unemployment and 2021 fiscal stimulus.

Predicting the effects of election outcomes is more straightforward for some sectors than others, and if the last election was any guide, the consensus view of broad market reactions can be wildly off-base. The sectors we expect to be most susceptible to election volatility are Health Care (affected by messaging around drug pricing and affordable access to care) and Technology (affected by messaging around trade and privacy regulations, likely to come from both candidates).

Although the Presidential race is certainly one of consequence, the Congressional election arguably has the potential for as much, if not more, impact on markets going forward. Fiercely contested issues such as corporate tax levels, health care and fiscal spending through the recovery are items that require Congressional support and face stark party divisions.

A major policy difference concerns the corporate tax rate. Right now estimates for the 2021 S&P earnings are $165. Everything else being equal, an increase of the corporate tax rate from the current 21% to 28% would shave SPX1 earnings by 10%, meaning the new baseline is roughly $149. That is a top line result and the companies which pay the full corporate rate will be more affected than those that pay a lesser rate.

In order to implement a new corporate tax rate though, a Biden administration would need Congress and presumably a Democratic Senate because tax law can only be passed by Congress. There may be some partial counterweights to higher rates in a Biden administration in that the removal of China tariffs could help offset some of the hit to corporate profitability that would come from higher taxes.

Trade policy is controlled by the administration without the need for Congress to act. If all tariffs were removed, an estimated $9 per share would be added back, for a net earnings expectation of $158 per share for 2021.

1 S&P 500 Index

 

Risks:

All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.

Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.

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