Throughout the U.S. electoral cycle of 2020, a collection of unique events drove a spirited race for the White House. Dubbed by political pundits as "the most important election of our time," Election 2020 featured incumbent Republican Donald Trump against Democratic challenger Joe Biden. Issues such as social welfare, homeland security, economic growth and the coronavirus (COVID-19) pandemic defined the contest.
From an economic standpoint, the difference between Trump and Biden is clear. The Trump administration promoted pro-business policy, led by deregulation, tax cuts and America-first foreign trade. Conversely, Joe Biden campaigned upon environmental issues, tax reform and the need to "restore America's credibility and influence abroad." Given the two contrasting ideologies, the financial markets were poised to respond very differently to the policies of the winner.
So, how will a Joe Biden victory impact the markets? According to an August 2020 CNBC poll of 20 analysts, 14 expected a Biden win with the influence on equities being unclear. The survey reported that half expected stocks to decline in the month after the election, five projected a rally, four estimated range-bound conditions and one was undecided.
CNBC's data suggested that analysts were torn on the election's eventual market impact. However, in the case of a Biden victory, the issues of tax cut rollbacks and environmental regulation emerged as potential market drivers. While the influence of Biden's policies remains to be seen, traders and investors widely view regime change as a primary underpinning for volatility in stocks, commodities and currencies.
Tax Cut Rollbacks
During primary season and upon winning the Democratic nomination, Biden repeatedly stated that he would roll back the Trump tax cuts of 2017. In a late-June 2020 speech to campaign donors, Biden alluded to making dramatic changes to the U.S. tax code:
"I'm going to get rid of the bulk of Trump's $2 trillion tax cut and a lot of you may not like that but I'm going to close loopholes like capital gains and stepped-up basis."
Accordingly, Joe Biden's official tax plan outlines several key revisions to the existing American taxation framework:
- The corporate tax rate will be raised from 21% to 28%
- The minimum tax on all earnings of U.S. companies operating abroad will be increased to 21%, twice the current rate
- Imposition of a tax penalty on corporations that ship jobs overseas in order to sell products back to America
- Placement of a 15% minimum tax on all corporate income
- Adjusting the top individual income tax bracket upwards to 39.6%
- Prompting individuals who make more than US$1 million annually to pay the same rate on investment income as they do on wages
Traditionally, lauding tax increases are not a primary focus of a presidential campaign platform. To address this notion, Biden went on record promising that the tax-cut rollback would not impact anyone making less than US$400,000 per year:
"Nobody making under US$400,000 per year would have their taxes raised. Period, bingo."
Since inception, the Trump tax cuts have been a point of contention among economists. Some estimates conclude that the reduction of the corporate tax rate has added around US$2 trillion in federal debt. The Biden tax plan is projected to raise more than US$3 trillion in the first decade after institution.
Studies on the Biden plan's eventual impact suggest that U.S. gross domestic product (GDP) would contract between 0.2% to 1.5% over the long-run. In addition, the American labour force is to shrink by 0.4% or 600,000 full-time jobs.
Traditional financial theory implies that increased tax liabilities contribute to falling corporate net incomes. Thus, earnings and equities valuations may be poised to suffer under Biden's tax plan. Should a full-blown economic contraction ensue, individuals will be more likely to save income, thereby reducing consumption. In response to shrinking consumption and economic output, the United States Federal Reserve (Fed) may choose to support the economy via extended quantitative easing (QE). If so, a weakened USD is likely to contribute to higher commodity prices and lagging performance against the forex majors.
Since formally announcing a run for the presidency, Biden has been an outspoken proponent of environmental regulation. Subscribing to some of the ideology put forth by the "Green New Deal," Biden's environmental plan makes a multitude of industrial concessions designed to combat climate change. On 14 July 2020, Biden unveiled his US$2 trillion energy package aimed at addressing the pronounced environmental crisis:
"There is no more consequential challenge that we must meet in the next decade than the onrushing climate crisis. Left unchecked, it is literally an existential threat to the health of our planet and to our very survival."
Below are the guiding tenets of the Biden environmental agenda:
- Ensure that the United States becomes a 100% clean energy economy and reaches net-zero emissions by 2050
- Update existing infrastructure to withstand the negative impacts of climate change
- Rally the rest of the world to address the threat of climate change by rejoining international agreements such as the Paris Climate Accords
- Take action against polluters that create health risks for disadvantaged and vulnerable communities
Biden's commitments to clean energy and environmental protection suggest the introduction of extensive industrial regulation. In fact, the Biden environmental plan outlines the creation of a Climate Justice Division within the U.S. Department of Justice (DOJ). The regulatory body is to be tasked with enforcing new rules governing the relationship of industry and environment.
One sector especially vulnerable to Biden's proposed shift to green energy is the U.S. fracking and fossil fuels industry. New restrictions on the production of shale oil and natural gas are being dubbed by industry insiders as catastrophic. According to the head of Rapidan Energy Group Bob Mcnally, "a Biden victory would unleash a Tet Offensive against the U.S. oil and gas sector."
Statements like Mcnally's have been confirmed by Biden on the campaign trail. In response to a question regarding the future of fossil fuels and fracking, Biden replied:
"No, we would ― we would work it out. We would make sure it's eliminated and no more subsidies for either one of those, either ― any fossil fuel."
While it is difficult to accurately project an incoming administration's effectual policies, Biden's commitment toward "net-zero carbon emissions by 2050" is likely to impact several markets. Estimates conclude that new restrictions on fossil fuel production will be costly and ban fracking on federal lands altogether. In the Texas/New Mexico Permian Basin, the proposed restrictions are projected to nullify US$261 billion in economic impact and eliminate 609,000 jobs.
However, Biden has stated that he does not support a nationwide fracking ban; only restrictions on new permits and operations on federal lands. Accordingly, the greatest impact from Biden's energy policies would be felt by producers operating in such designated areas.
Ultimately, the institution of new industrial restrictions and environmental reforms is likely to reduce economic growth, at least in the short-term. In addition, reduced U.S. fracking will take vast crude oil and natural gas supplies off the market, thus spiking the median prices for energy products globally. Both events are far from certain, but if they come to fruition, the stage will be set for a rally in oil-related commodity dollars and growth-stimulating Fed policy.
The U.S. Presidential Election of 2020 offers voters two contrasting ideologies regarding economic development. Incumbent Donald Trump favours deregulation and a minimalist tax structure while challenger Joe Biden is an advocate for environmental protections and higher corporate tax rates.
However, there are a few other areas where Biden seeks to make a 180-degree turn on existing policy. Among the most frequently cited are U.S. foreign trade, secondary education and immigration reform. From an economic standpoint, eliminating the Trump-era tariffs on Chinese imports has been a staple of the Biden campaign. When asked if the he would scrap existing tariffs, Biden replied:
"Manufacturing has gone into a recession. Agriculture lost billions of dollars that taxpayers had to pay. We're going after China in the wrong way."
Historically, having a Democratic president leads to higher returns in the American equities markets. Since 1900, the Dow Jones Industrial Average (DJIA) has gained 9% per year under a Democratic POTUS, while only 6% under Republican leadership. Although these figures are broad averages and overlook massive 34% downturns as in 2008 (Democrat, Obama), they do suggest positive U.S. stock market performance under Biden.
On the other hand, the issues of taxation and regulation pose immediate questions regarding the future of U.S. economic growth. Further, a heightened capital gains tax is likely to directly influence the investment strategies of countless individuals.
Although many are optimistic about the potential of green energy and the elimination of foreign tariffs, a Biden victory creates a great deal of economic uncertainty. And, as a general rule, the markets aren't fond of uncertainty. At least during a transitional period, volatility in the equities, commodities and currency markets is highly likely following a Biden victory.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…