By Matthew Gaude & Shawn McGuire
When it comes to politics, there’s a lot up in the air right now. And regardless of what policies you agree or disagree with, or what side of the aisle you identify with, most of us are wondering the same thing: What will things look like after the election? While we can’t predict the future, we can provide some insights on what to expect if Trump gets re-elected for a second term.
What We Learn From History
Before we take a deep dive into different areas of the economy, let’s first look back and see what history has to tell us about elections and the markets. While who will win is anyone’s guess at this point, especially considering how close recent elections have been, the markets do tend to give us some clues. In previous elections, S&P 500 performance in the three months leading up to the election has been a predictor of who will live in the White House come Inauguration Day. Positive markets tend to signal an incumbent win and market declines an opposition party victory. How accurate is this prediction? As shown in the graph below, stock market returns in the three months prior to an election have accurately predicted the results 100% of the time since 1984, and 87% since 1928. (1)
Using this metric, what do the markets tell us about the likely results of November 3rd, 2020? So far, since August 3rd, the S&P 500 is up around 6% with new record highs, (3) favoring a Trump win.
But if this year has taught us anything, it’s that we can’t predict much. History also shows us that when there’s a recession in the last half of a president’s term, they don’t usually get reelected, (4) and the coronavirus pandemic has definitely thrown our markets into an uproar after a record-long bull market. All that to say that there’s a lot we’ll just have to wait and see about.
Finally, we have the matter of the House and Senate. Right now, Democrats hold the House while Republicans hold the Senate. If Trump wins, it’s unlikely this would change. And once again, history gives a clue for the future and shows us that a split Congress can be better for stocks since the markets tend to appreciate the checks and balances that come with a divided Congress.
A problem with envisioning what the next four years will look like with Trump in office is that we’re in a historic moment with plenty of uncertainty. There’s still so much in the air with regards to the COVID-19 pandemic, including when a vaccine will be ready and when our country will be able to return to life as usual. That being said, we can look back at the past four years and gain some understanding of how Trump may do things going forward.
US Election: Risks & Opportunities
On the trade front, the differences between the candidates may be more stylistic than substantive. The tactics and tone of the U.S.-China relationship might change.
Trump often takes a confrontational tone on social media. Biden is probably a much more conventional politician in regard to trade and foreign policy and would be more likely to build multilateral coalitions to try to influence China. However, there is a broad, bipartisan consensus to get tough on China, so any future policies are likely to continue to ramp up export controls, restrictions on investment, and other decoupling activities that deepen deglobalization pressures. Among them: Incentives to bring back key links in the industrial supply chain to the U.S. or at least diversify out of China. (10)
As we head into election day, investors are understandably wondering—and even anxious—about how the U.S. presidential election will affect the financial markets. It’s important to remember that this year, especially, the election isn’t the only market driver, or even the main one. Clearly there’s going to be a market impact from this election, but some of what impacts the market will be decided by a slew of other things beyond who’s at the top of the ticket such as “Where are we with the virus?” or, “Where are we on the economy?”
Donald Trump’s term has been anything but average. Trump years one and three (2017 and 2019) far outstripped the average price gain in the S&P 500 index for comparable years, going back to Franklin Roosevelt’s term beginning in 1941 through Barack Obama’s presidency, ending in 2016. Trump years two and four have underperformed the average. The question is whether the market’s recent upward trajectory will continue long enough to bring this election year up to average or beyond. (11)
Infrastructure. Both sides agree that infrastructure spending is needed, and the passage of any plan would be a big win for industrials and materials companies.
But the parties disagree on how to pay for it. Trump’s 2018 plan called for mostly private-sector funding. (He has a $1 trillion plan in the works, but funding details are still unclear.) Biden’s $2 trillion plan would be federally funded, in part by higher corporate taxes.
Although repairing crumbling roads and bridges and investing in 5G wireless and rural broadband are on the to-do list of both sides, some of Biden’s initiatives—increased mass transit and a high-speed rail network—tilt toward lowering our reliance on fossil fuels. Trump’s first-term initiatives, on the other hand, have encouraged fossil-fuel production.
The biggest hurdle for infrastructure initiatives is timing, given the struggling economy. The impact on growth tends to be watered down if a program takes years to play out.
Health care. Biden wants to expand coverage of the Affordable Care Act; Trump wants to abolish the health care law. Both positions create uncertainty that could weigh on health care stock prices.
One area of agreement: lowering drug prices. Trump proposed a rule last year to allow Americans to import some prescription drugs at lower prices from Canada. Biden supports lowering drug prices to match those of other nations, among other proposals.
Innovative drug and medical device stocks are less vulnerable to battles over the ACA and drug prices. Hospitals, big winners under the ACA, face the most risk with any uncertainty about the health care law.
Energy and climate. If reelected, Trump would continue to strip away energy regulations and encourage fossil-fuel production. That would lift the energy industry, hobbled this year after a dispute between Saudi Arabia and Russia over limiting oil supply coincided with a pandemic-related fall in demand.
A Biden administration would focus on clean energy and lower emissions standards, among other things, in the name of combating climate change. His $2 trillion clean-energy and infrastructure plan hopes to achieve an emissions-free power sector by 2035 and invest in game-changing clean-energy technologies. That bodes well for green investing strategies, particularly in renewable energy.
Six Key Areas To Analyze
With that behind us, let’s turn our attention to six areas to analyze if Trump gets reelected.
First, the positives. The Trump administration enacted the Tax Cuts and Jobs Act of 2017 (TCJA), which had a positive impact on consumer spending, corporate profits, and our markets. This bill showcased Trump’s support for lower corporate tax rates, small business tax rates, and individual tax rates. That would likely continue in a second term. On the personal taxation front, the Trump administration’s plan to release a package of tax proposals was put on hold as other developments-the coronavirus pandemic in particular—have taken center stage. But based on Trump’s public statements, one of his top tax priorities in his second term would be to make provisions in the Tax Cuts and Jobs Act permanent. Unless Congress acts, most of the individual tax cuts included in the act will expire in 2025.
Trump has also expressed an interest in providing more tax relief for middle-class workers. Earlier this year, National Economic Council Director Larry Kudlow said Trump was considering a “Tax Cuts 2.0” that would provide a second round of tax cuts focused on the middle class.
In the short term, though, most of Trump’s tax proposals are focused on stimulating the economy, which has been devastated by the pandemic. He has proposed stimulating the economy by cutting payroll taxes, which would increase the size of workers’ paychecks. He has also suggested he would support a $4,000 tax credit for Americans who travel domestically. The travel industry, which has been hard hit by the pandemic, says such a credit would encourage people to take vacations, but it’s unlikely to gain much support in Congress. (11)
Because many businesses have suffered greatly under the COVID-19 lockdowns, we can probably expect to see lower business taxes continue. And if businesses know they have a president who will support lower rates for the next 4 years, they may feel more confident about planning for the future and getting back on their feet. Some business TCJA cuts are not permanent, so the sitting president will need to take action to extend them. We also know that Trump is passionate about bringing business back to America and ending our dependence on China, which means we may see more tax credits to bring companies back to American soil.
If you’ve followed Trump’s policies over the past 4 years at all, you probably noticed that deregulation is a key goal for him, especially regarding finances and energy. While we can expect that to continue, we don’t know what the broader overall effect will be, since the S&P 500 didn’t reflect that in relative sector performance.
Trump’s deregulation also benefited small businesses, to the point where small business optimism reached record highs after Trump was elected in 2016. (6) It’s an understatement to say that small businesses have been hurt by COVID-19, so it’s a waiting game to see if confidence can recover going forward.
With unemployment at devastating levels, (7) a strong focus on jobs is important for whomever our president is come January 2021. Trump promises to create 10 million new jobs in 10 months, (8) despite there being no end in sight for the coronavirus pandemic. To make this a reality, Trump will need to implement policies that increase jobs in America and bring new people into the labor market.
The China trade dispute was a significant event in Trump’s first term, and it could ramp up again. He has shown himself to be tough on trading partners, like China, the EU, and American companies with employees in other countries. Trump is still dedicated to reducing America’s reliance on China, which could lead to some extra stress for companies with revenue and supply chain exposure to China. (9)
While the new stimulus package negotiations between Democrats and Republicans have stalled, Trump is still dogged in his desire to provide some sort of relief to American residents. This could look like payroll tax deferral, extended unemployment benefits, and more.
Trump’s priorities. Donald Trump and the Republican party are focused on reducing the federal government’s hand in health care, and dismantling the Affordable Care Act is central to that approach. In late June, the Trump administration submitted a brief to the Supreme Court in support of the claim by a coalition of 18 states that the ACA—widely known as Obamacare—is unconstitutional following Congress’s 2017 move to reduce to zero the tax penalty on Americans who don’t have health insurance. The court will likely hear arguments on the case this fall.
Details are vague on what a replacement for the ACA would look like. In past efforts to repeal the law, Republicans proposed pulling back on tax credits for health plan premiums in the individual marketplace and on Medicaid expansion, which makes all low-income adults in participating states eligible for Medicaid. Instead, more money would be directed to state governments, allowing them to set up their own plans.
In a second term, Trump may continue initiatives involving patients’ rights. A court ruling recently upheld a Trump administration requirement that hospitals disclose rates that they currently negotiate in secret with insurers for services. The administration also created rules last spring expanding patients’ access to medical records.
It may feel like the world is in an uproar right now, so we hope this summary has helped give you a framework for what a Trump second term could look like economically. We will be providing you with a Biden article soon as well. If you have any questions about Trump’s fiscal policies or how you can set up your finances to succeed no matter who our president is, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
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