Would a Biden Presidency Hurt Stock Prices? - Hartford Funds
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THIRD QUARTER 2020
Insight
Would a Biden Presidency Hurt Stock Prices?
Our analysis suggests such an assumption would be premature.
IT’S NOT JUST COVID-19 AND THE SUBSEQUENT ECONOMIC SLUMP THAT ARE OCCUPYING
Insight from sub-adviser INVESTORS’ MINDS. Investors are also beginning to worry about the risks
Schroders Investment Management surrounding the 2020 US presidential election.
Sean Markowicz, CFA
Recent polls show that the presumptive Democratic nominee, Joe Biden,
Strategist, Research and
is poised to win, and the prevailing view is that this would have a negative
Analytics
impact on the stock market. However, our analysis suggests this assumption is
premature. Historically, no political party has been exclusively good or bad for
markets.
So why do investors view Democratic presidents as cause to be bearish? One
reason is that they tend to enact more business-unfriendly policies, such as tax
increases and regulation, which can weigh on corporate profitability.
Although this is a reasonable expectation, the reality is far more complicated.
Presidential policies matter more than just party affiliation. Some markets and
industries may emerge as relative losers, while others may be more insulated.
How Have Markets Performed Ahead of a US Presidential Election?
Stock prices have on average fallen in the final three months leading up to
an election whenever the incumbent political party lost, but rallied if the
incumbent party won. This is irrespective of whether the president was a
Republican or Democrat.
Key Points FIGURE 1
Although the prevailing view
is that the presumptive
Markets Have Been Good at Predicting US Presidential Outcomes
Democratic nominee, Joe S&P 500 Index real % change three months before election
Biden, would have a negative
impact on the stock market,
our analysis suggests this
assumption is premature.
Stock prices typically fall in the
final three months leading up
to an election whenever the
incumbent political party lost,
but rallied if the incumbent
party won, regardless of
political party.
What matters more than the
political party of the president
is the policies they choose to
enact and their net impact.
Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Sources: Datastream
Refinitiv, Robert Shiller dataset and Schroders, 7/31/32-10/31/16. Notes: Real (adjusted for inflation) price change from 7/31-10/31 of every election
year. Period covers 22 presidential elections, 13 in which the incumbent party won and 9 in which they lost. S&P 500 Index is a market
capitalization-weighted price index composed of 500 widely held common stocks.
1Insight
So, if investors believe Trump will lose in November, history would suggest that
markets are more at risk of selling off than rallying in the upcoming months.
Since 1933,
Democratic Who Is Better for Investors? A Democratic or Republican President?
A longer-term analysis, however, suggests that things are not so clear-cut. Although
presidents have you might think Democratic presidents are worse for equity markets, the evidence
on average seen suggests the contrary.
higher stock market Since 1933, Democratic presidents have, on average, seen higher stock market
returns than Republican ones. For example, the average real (adjusted for inflation)
returns than
total return for the S&P 500 Index under Democratic presidents was 10.2%, versus
Republican ones. 6.9% under Republicans.
FIGURE 2
Democratic Presidents Saw Higher Stock Market Returns Compared to Republican Presidents
S&P 500 Index annual real total return, %
25
20
15
Democrat average
10
Republican average
5
0
-5
Roosevelt
Truman
Eisenhower
Johnson
Kennedy
Nixon/Ford
Carter
Reagan
Bush H.W.
Clinton
Bush W.
Obama
Trump
Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Source: Datastream
Refinitiv, Robert Shiller dataset, and Schroders, 7/31/93-10/31/19. Notes: Real (adjusted for inflation) total return from 1st year in office to 7/31
of final year in office so as to exclude the election effect (President Trump’s term is shown through 12/31/19).
2Insight
The problem is that nearly all of this average outperformance advantage can be
explained by the boom years under Bill Clinton and the subsequent dotcom bust
and Global Financial Crisis under George W. Bush. Excluding these two presidencies,
Neither political the difference in returns is practically zero.
party is exclusively Neither political party is exclusively good or bad for markets. Instead, what matters
good or bad for more is the policies presidents choose to enact and their net impact. For example,
although President Trump’s tax cuts were widely seen as a positive development for
markets. Instead, markets, his handling of foreign policy and trade issues had the opposite effect.
what matters more
What Impact Would Biden’s Main Policies Have on Equity Markets?
is the policies Taxes: The largest risk facing equity markets is the potential for US corporate tax
presidents choose rates to increase. In 2017, Trump lowered the tax rate from 35% to 21%, delivering
a major boost to US earnings per share (EPS)1 and stock prices. However, Biden has
to enact and their said he would like to partially reverse this policy in early 2021, which could have
net impact. significant consequences for equity investors.
For example, UBS estimates that raising the tax rate to 28%, alongside other
proposed tax changes, would lower S&P 500 Index profits by 8%. On top of this,
Biden has proposed to raise the minimum wage, which would also weigh on
corporate profits. Together, such moves could potentially increase the appeal of
non-US equities, after years of the US outperforming the rest of the world.
At the sector level, communication services, healthcare, and consumer staples
would see their earnings impacted the most. Meanwhile, energy, real estate, and
utilities would likely not be materially affected.
FIGURE 3
Some Sectors Look More Vulnerable Than Others to a Rate Hike
Estimated earnings impact from Biden’s tax plan
Forecasts included should not be relied upon and are not guaranteed.
Source: UBS and Schroders. Data as of 7/9/20.
3Insight
All of this, of course, depends on the Democratic party securing a majority of seats
in the Senate, without which they are unlikely to pass major tax legislation.
Besides, there is a possibility corporate tax reform would take a back seat in Biden’s
first year in office while economic rescue packages are prioritized.
Healthcare: The pandemic has disproportionately affected lower-income families
and exposed the inequality in access to healthcare in the US. As a result, Biden
is expected to double down on drug pricing control and to create a public health
insurance option to compete with private companies.
Both policies are negative for pharmaceutical companies and health insurers, but
would still require congressional approval and, in any case, have a milder market
impact compared to more far-reaching alternatives such as the “Medicare for All”
scenario championed by Bernie Sanders.
Tech: We have already highlighted the immense concentration of the US equity
market in the five largest technology companies—Microsoft, Amazon, Apple,
Google, and Facebook—which account for 20% of the total US market value.
For many months, the prevailing concern was that the Democratic nominee would
usher in new antitrust rules against these tech giants and, at worst, break them up
into smaller businesses.
However, Biden’s general stance on tech has remained relatively unclear. At the
same time, the coronavirus has dampened the anti-tech momentum, not least
because of our increasing reliance on digital services, as millions of people are
confined to their homes.
Despite this, the Democratic Party has moved significantly to the left on this issue
and can be expected to pressure Biden to ramp up regulatory scrutiny.
The low taxes paid by these firms are also likely to be a focus. For example, Biden
has proposed to double the global minimum tax on off shore profits from 10.5% to
21%.
Foreign Policy: With 66% of Americans having an unfavorable view on China,
geopolitical tensions between the US and China are likely to continue under a Biden
presidency, especially with regard to technology and trade practices.
On the other hand, there is a high probability Biden will restore economic
cooperation with Europe and Asia, while also easing up on tariff s. This would inject
a degree of predictability and stability into global affairs, which would be a welcome
relief for global markets after a volatile few years.
And if global trade activity picks up in response, this could be the catalyst for
investors to return to some export-oriented emerging markets that were adversely
affected by the US-China trade dispute.
4Insight
What Are the Different Possibilities Facing Investors If Biden Wins?
The perception that a Biden win would be a bad outcome for markets is not
substantiated by the historical record on Democratic presidents. Investors
should instead focus on his policy agenda and its potential investment
implications.
If there is a Democratic sweep of Congress, US share prices are likely to price
in an increase in corporate tax rates. This would bolster the appeal of non-US
equities, especially if coupled with reduced trade frictions.
On the other hand, if Republicans retain control of the Senate, tax reforms are
unlikely to pass. But, as most foreign policy decision-making resides with the
president, we can still expect an improvement in international relations.
This combination of the tax status quo and a defrosting of international
relations would be the best-case scenario for global markets.
Over the medium term, sector-specific issues may arise that could weigh down
on the valuations of US healthcare and tech stocks. Investors should remain on
guard if they are overly exposed to such areas.
You can access our latest timely insights at hartfordfunds.com
1
Earnings per share is a measure of a company’s profitability, the opinions of Hartford Funds or any other sub-adviser to our funds. They should
calculated as profit divided by the number of outstanding shares. not be construed as research or investment advice nor should they be considered
Important Risks: Investing involves risk, including the possible loss an offer or solicitation to buy or sell any security. This information is current at
of principal. • Foreign investments may be more volatile and less the time of writing and may not be reproduced or distributed in whole or in part,
liquid than US investments and are subject to the risk of currency for any purpose, without the express written consent of Schroders Investment
fluctuations and adverse political and economic developments. Management or Hartford Funds.
These risks may be greater for investments in emerging markets.
Investments in particular sectors may result in increased volatility and Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD),
risk of loss if adverse developments occur. Member FINRA. Certain funds are sub-advised by Schroder Investment
Management North America Inc. Schroder Investment Management
The views expressed herein are those of Schroders Investment Management, are
North America Ltd. serves as a secondary sub-adviser to certain funds.
for informational purposes only, and are subject to change based on prevailing
market, economic, and other conditions. The views expressed may not reflect WP550_0820 219093
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