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Will Biden’s Election be a Disaster for the Stock Market?

By October 1, 2020 No Comments

The debate on Tuesday night was not productive for understanding policy changes and how they will affect markets.  While there are more investors who feel Trump’s policies are better for markets than Biden’s, there is no need to panic if Biden wins the election.  In fact, it would be difficult to discern who would be better for the stock market in the long run especially.  We thought it might help to put things into perspective with respect to economic and tax policy.

Regardless of who is our next president, there are two powerful forces driving stock market prices that are unlikely to change under either administration.

  • There is extensive fiscal stimulus. Our government may end up spending twice what it takes in this year.  Prior to COVID, government spending was more than 30% over collections.  This is not sustainable and either spending needs to be reduced or revenues increased.  This is not a communication on public policy other than to point out the factually correct statement that tax cuts overwhelmingly benefited those with higher income and wealth— i.e.: the investor class.
  • There is extensive monetary stimulus. The Federal Reserve is keeping interest rates below the rate of inflation by purchasing bonds.  In addition to purchasing government debt, the Fed is supporting the credit markets by purchasing corporate bonds as well.  This unprecedented action also has a powerful effect on other asset prices such as stocks.

The extraordinary effects are likely to continue until there is some recovery in the areas of the economy that were most affected by COVID.

Biden’s tax plan is for the most part, somewhere between where we were before the Trump tax cuts and current policy.  There are some potential new taxes which are highlighted as well.  Keep in mind, the current tax cuts are set to expire in 2026.

Income Tax Rates

  • Increase the top personal income tax rate back to 39.6% from 37%. Taxpayers making more than $400,000 would see higher taxes but the maximum rate would kick in at higher levels.
  • Cap itemized deductions at 28% and end the SALT (state and local taxes) cap. This could be beneficial for those living in states like Illinois with high property taxes.
  • Restore the Pease limitation on itemized deductions for taxpayers earning more than $400,000. This limit has been removed since 2018.

Social Security

  • Remove social security taxable wage base cap on earned income above $400,000. This would be a big change.  Social Security will not be able to pay full benefits by 2034-2035 under current estimates and it is well known that changes to the system are likely necessary.  Social security taxes are currently assessed on the first $137,700 of income.  The tax would then start to be reapplied once earned income exceeds $400,000.

Capital Gains

  • Tax long term capital gains at the top ordinary income rate of 39.6% for taxpayers with over $1 million income – a drastic increase from the current 20% rate. This probably has the least likely chance of passing and has the possibility of causing tax receipts to decline in addition to distorting markets.

Estate Taxes

  • Eliminate stepped-up basis rule which allows people to pass capital gains to heirs without tax after death. This provision has been part of tax overhaul discussions for years.   It may gain traction with the need to raise revenue, but it would be targeted to larger estates with a significant exemption for smaller estates.
  • Reduce the estate tax exemption to $5.0 million. This has a chance of passing.  A married couple with minimal planning would still be able to pass on $10 million tax-free, but the estate tax rate is 40% which is higher than income tax rates.

Corporate Taxes

  • Raise corporate income tax rate from 21% to 28%
  • Establish a 15% minimum tax on companies reporting more than $100 million in the US
  • The corporate tax rate increase is likely to affect markets the most since it reduces cash flow.

Election years in general can breed market volatility – particularly this year.  With an extremely divided political climate,  civil unrest,  a continuing pandemic with its related economic fallout, and a growing probability that election day results will be contested or delayed, short-term risks are very high.  However, with high investor and corporate cash balances combined with the stimulus mentioned above, no matter how unevenly distributed, the economy will likely stay on some growth path.   Market volatility likely will remain high leading up to and beyond Election Day.    We are both cautious and optimistic and expect the broader market to participate in the recovery.  Technology may still perform well, but the five stocks representing 25% of the S&P 500 are likely way ahead of themselves and may have limited opportunity to continue their torrid run in this environment.

Please do not hesitate to contact us with any questions or concerns.