Biden, a friend of the markets? Really?

Over the past fortnight, the probability of the Democrats taking the Senate and thus increasing the likelihood of a Blue Sweep if not a Blue Wave, has become a new distinct possibility.

True, if the Democrats held the majority of both the House and the Senate, their planned fiscal, tax and regulatory reforms would be more likely to be implemented. Every other year, one third of the 100 Senate seats are up for election. This year, 35 seats, including 23 Republicans and just 12 Democrats, are contested, giving an advantage to the Democrats.

In addition, according to polls carried out in individual States four Republican seats are liable to be won by Democrats (although one Democratic seat in Alabama is being challenged).

But it is also true that investors focus on the short term. The currently still fragile US situation, both economically and in terms of public health, would probably incite Biden to moderate and/or postpone his tax hikes. A more peaceful approach (in its form) to the US relationship with China would possibly ease volatility, which is also likely in the short term. But Biden’s most popular proposals are fiscal stimulus measures. With a Blue Sweep, the quick implementation of these plans would obviously become more likely. As such, we believe that some of Joe Biden’s stimulus measures (welfare and healthcare spending) would start in 2021 ahead of fiscal tightening (income tax and corporate tax), which would not be implemented until 2022.

This very expansive fiscal approach is particularly credible because the Democrat-led House of Representatives passed a stimulus plan (Heroes Act 2) on 1 October for USD2.2tn within the framework of negotiations with Republicans on the extension of previous aids, especially for households (unemployment benefits, stimulus cheques, job protection, healthcare, housing, etc.). These measures, if adopted next January, would come on top of the stimulus included his platform. All in all, in that case, we are looking at about 2.5 points of GDP gross impact on the economy.

This would fully wipe out the impact of the initial fiscal tightening planned for 2021 (-1.5 points of GDP due to the gradual expiry of the Cares Act), with net positive impact on activity of about 1 point.

In fact, Trump is not opposed to fiscal expansion (he has proposed to go beyond the USD1.8tn currently on the table), but many believe Congress Republicans, and Republican Senators especially, are not in favour. All told, a Blue Sweep would be positive for the equity markets in the short term.

Looking at the medium term, we can only repeat what we have been saying for many months: for Wall Street, Trump is a better candidate than Biden. This reflects the fact that Biden wants to raise taxes in such a way that the financial markets are unlikely to see this in a favourable light; Biden’s platform includes a hike in the corporate tax rate from 21 to 28%, a twofold increase in specific taxation of US companies’ international subsidiaries income on intangible assets (global intangible low-taxed income, or GILTI), a rise in the top marginal rate of income tax to 39.6% for those earning over USD400k and capping of tax breaks, raising the CGT and dividend tax to the standard rate for high net worth individuals (USD1m+), etc. Furthermore, Biden plans a twofold increase in the minimum wage (1.6 million people in the US are concerned). Also, Democratic Administrations are typically more regulationist (except under Bill Clinton) than Republican Administrations (except under Richard Nixon).

All told, a Blue Sweep would be negative for the equity markets in the medium term.