Stock market investors in general don’t seem all that concerned about the possibility of Joe Biden winning the White House in November. Stock prices have marched relentlessly higher in recent months, even as the former vice president maintains a lead over President Donald Trump in the polls.
But investors might want to think hard about the ramifications of a single-party sweep as the election approaches. They also might want to delve deeper into Biden’s proposed tax agenda and possible impact on various industries.
Democratic presidents often are assumed to be less friendly to business and thus not favorable to stock prices. But in reality, stocks typically fare a bit better under Democrats than Republicans, various studies have found, although the results depend on how many elections you analyze.
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Jurrien Timmer, a director in Fidelity’s global asset-allocation division, found that stocks did better early in a Republican presidency compared with a Democratic administration in his historical study. But over full four-year terms, the results were basically a dead heat, Timmer wrote in the report.
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Congressional makeup important
Maybe the bigger question is what happens to Congress. Currently, Democrats appear likely to retain control of the House this fall, with the Senate up for grabs.
“Stocks have tended to do their best when we have a split Congress,” wrote Ryan Detrick, senior market strategist at LPL Financial. “Markets tend to like checks and balances to make sure one party doesn’t have too much sway.”
Since 1950, the Standard & Poor’s 500 index has returned an average 17.2% annually during years of split Congresses, according to LPL Financial. That compares with 13.4% on average when Republicans control both the House and Senate and 10.7% when Democrats are in charge. Timmer found that a Democratic president and divided Congress represents the best outcome for investors, based on the historical record.
Incidentally, the stock market tends to fare worse in the year or two after an election than during the two years preceding an election – a result on which the various studies tend to agree.
In the first year after an election, large stocks have returned about 7.9%, according to Timmer’s report, rising successively to a 9.1% average gain in the fourth years, which also happen to be election years.
Biden’s impact on industries
While the overall market might not be affected much by which party takes control of the White House, companies in certain industries could feel the repercussions.
For example, pharmaceutical companies appear to be lagging because of the possibility of a Biden victory, while various alternative-energy companies are on a roll, wrote Jack Ablin, chief investment officer at Cresset Asset Management, in a commentary.
Pharmaceutical makers could be hurt if Biden reinforces the Affordable Care Act to give the federal government more power to negotiate lower prescription drug prices.
“Negotiated pricing would likely dent health-care sector profits because, under the current system, most cost increases are borne by patients and their employers,” Ablin said.
Many health-care stocks have struggled in recent months as a Biden victory has become more likely. “Large pharma has trailed the market since May, about the time when Biden gained a statistical advantage” in the polls, Ablin wrote.
Biden also supports a new financial-risk fee on megabanks, according to the Committee for a Responsible Federal Budget. That, and the possibility of Sen. Elizabeth Warren being named as treasury secretary in a Biden administration, might explain why bank stocks have been lagging lately. The potential for more loan problems amid the coronavirus could be another factor weighing them down.
Potential boost to green energy
On the plus side, companies engaged in providing alternative energy could benefit if the Democrats’ Green New Deal becomes policy. Biden supports electric vehicles, expanded charging stations and zero-emissions public transportation, Ablin wrote. Stocks including electric-vehicle maker Tesla, Vestas Wind Systems and Tempe, Arizona-based First Solar, which makes electricity-generating panels, have outperformed lately, he wrote.
Traditional oil and gas companies have been reeling from slumping demand triggered by reduced driving and air travel from the pandemic. They could face a further headwind from an antagonistic Biden administration.
“The presidential hopeful would seek to tax carbon emissions, end new oil and gas leases on federal land, and terminate offshore drilling,” Ablin wrote. “Among all the industries, it seems that foreign and domestic fossil-fuel companies would be the most disadvantaged by a Biden presidency.”
Possible income-tax changes ahead
A Biden victory also might alter the nation’s income-tax code, especially if Democrats hang onto the House and wrest control of the Senate, making it more likely he could push his agenda through Congress.
Biden has proposed raising the top rate for individuals from 37% currently to 39.6%, where it stood prior to tax reform, according to a report from the Committee for a Responsible Federal Budget. He also has advocated taxing long-term capital gains as ordinary income for high earners, while subjecting income above $400,000 to Social Security payroll taxes. Currently, taxes to support Social Security are levied on the first $137,700 in income only.
Upper-income Americans might face another headwind – possible elimination of the “step up” in basis. If that happens, more assets held by wealthy families might be subject to capital-gain taxes at death.
Conversely, Biden could create some new tax credits for renters and first-time home buyers and, possibly, a more generous credit for children and certain dependents.
In short, the Biden plan would increase taxes for the top 1% of Americans by between 13% and 18% and by 2% to 6% for those falling in the top one-fifth of household incomes, according to the committee’s report. The impact on most other individuals would be minimal.
More on corporate taxes
Biden’s plan would raise the corporate tax rate to 28% from 21% currently and impose minimum rates for domestic and foreign income, said the Committee for a Responsible Federal Budget. A higher corporate rate might take a bite out of profits, although a 28% rate still would be below the 35% corporate levy that applied before reform legislation enacted in 2017.
Biden’s tax plan, if implemented, would “moderately slow the pace of economic growth,” the committee predicted.
One interesting footnote is that higher corporate tax rates don’t always hurt stock prices. In fact, since World War II, the federal government boosted corporate income-tax rates on five occasions, yet the S&P 500 index was up 12.9% on average 12 months later, according to Surevest Wealth Management in Phoenix.
“Most companies do not pay the maximum corporate tax rate; rather, their effective rates are much lower,” Surevest explained.
Besides, many other factors also affect stock prices. Taxes and politics are just two pieces in the puzzle, albeit important ones.
Reach Wiles at email@example.com.
This article originally appeared on Arizona Republic: History suggests how a Biden presidency may affect the stock market