US elections: The road to 2020

Investment implications of the 2020 US presidential and congressional elections

Election Day countdown

Our coverage of the 2020 US elections and their investment implications will continue throughout the months ahead. Follow along as we monitor the race and help guide your portfolio decisions.

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A framework of six key factors impacting this election cycle and what they mean for investors.

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The state of the US presidential race amid COVID-19 concerns

Voters have some newfound clarity with Joe Biden set to win the Democratic nomination, but the coronavirus pandemic has caused further uncertainty.

 

Biden versus Trump: Likelihood and market impact of policy proposals

Corporate taxes

Joe Biden

Policy proposal

The Tax Cuts and Jobs Act (TCJA) lowered the top corporate income tax rate from 35% to 21%. Biden would likely try to raise the rate to 28%, and impose a 15% minimum tax on companies’ book income. He would also aim to double the minimum tax on profits earned by foreign subsidiaries of US firms from 10.5% to 21%.

Likelihood

Enactment would be plausible, but corporate tax increases would require Democratic control of the Senate. Given the size of the budget deficit and the desire to increase spending in some areas, revenue has to come from somewhere and corporate income tax may be a more attractive choice than an increase in the highest marginal rate for personal taxes.

Market impact

If enacted, Biden’s corporate tax policies would reduce after-tax profits of listed companies, especially those hit by the minimum tax, and moderately weigh on equity markets.

Donald Trump

Policy proposal

President Trump wanted to cut the corporate tax rate to 15% but in the end settled for 21% in the TCJA. He has not said anything recently, but it is possible that he will propose 15% again later in the campaign.

Likelihood

Future corporate tax cuts under President Trump would be unlikely as this could only be done in the unlikely event Republicans gain control of the House as well. Given the current high budget deficit and high debt levels, it would be difficult to cut corporate taxes any further on a permanent basis. A temporary tax cut in response to the pandemic is possible.

Market impact

While unlikely, if future tax cuts were enacted, they would significantly increase after-tax profits of listed companies and help equity markets.

Drug pricing

Joe Biden

Policy proposal

Biden would likely propose more modest drug-pricing reform, similar to the bipartisan proposal from the Senate Finance Committee (SFC).

Likelihood

Biden comes from Delaware, which has a strong pharma presence. He would likely work with industry, supporting a moderate drug-pricing bill that could garner bipartisan support.

Market impact

Pharma/biotech stocks should react positively, especially once the market sees the details of a specific moderate proposal, and can eliminate the worst downside scenarios.

Donald Trump

Policy proposal

Mixed and shifting, but has centered on the International Pricing Index (IPI), in which the government effectively tries to piggyback on the direct price negotiations that other countries have with pharma/biotech. Trump has also signaled he would support the Senate Finance Committee’s bipartisan bill, as indicated in a 10 March White House policy statement and 11 March op-ed from the director of the White House Domestic Policy Council.

Likelihood

Reform is likely as Trump wants to do something on drug prices to burnish his legacy. The bipartisan Senate Finance Committee bill represents a reasonable compromise, most likely after the election. 

Market impact

Positive for pharma/biotech, as a compromise bipartisan bill, along the lines of the SFC proposal, would have modest and manageable impact on pharma/biotech margins and earnings, while clarifying the future landscape for an extended period and removing the downside scenario that has been a significant overhang to investor sentiment.

Energy and environment

Joe Biden

Policy proposal

Joe Biden strives for zero-carbon emissions by 2050. His plan is to invest in clean energy and climate-related infrastructure. His proposal would end fossil fuel subsidies, but does not specify a fracking ban.   

Likelihood

It’s possible for Biden to find common ground on infrastructure investment and tax rollbacks. Policies that stand to have an outsize impact on the energy industry are likely to face opposition and are less likely to pass.

Market impact

We see potential disruption for those companies with operations on US federal land, but oil and gas production will continue, alongside development of renewables. Utilities would likely be viewed as moderate beneficiaries.

Donald Trump

Policy proposal

The Trump administration has expanded offshore oil and gas drilling and opened more leases to develop the US offshore market. This came alongside efforts to increase energy exports and the approval of infrastructure projects to support additional oil and gas production.

Likelihood

A continuation of the status quo under President Trump is most likely. Additional policy proposals supporting fossil fuels could face opposition from environmentalists and will be difficult to pass if Democrats maintain control of the House.

Market impact

This scenario would represent the status quo in our view and would not have significant market impact.

Financial regulation

Joe Biden

Policy proposal

Biden would look to reverse the deregulatory trend under President Trump, replace the heads of regulatory agencies (Fed, OCC, FDIC, and CFPB), and reimpose Obama-era regulatory interpretations of Dodd-Frank Act rules.

Likelihood

Increased regulation would be possible under Biden. Potential leadership changes at key regulatory agencies could be done by Biden alone and could lead to the reversal of more industry-friendly policies. In particular, we believe the Consumer Financial Protection Bureau (CFPB) could see significant rule changes and further bank consolidation could face greater regulatory challenges.  Additionally, regulatory interpretations could change solely based on Biden’s ideologies, without congressional input.

Market impact

Reversal of recent regulatory easing would constrain potential for profit growth. Tighter constraints on bank capital and liquidity could spread to the broader market and economy by limiting consumer and business access to loans.

Donald Trump

Policy proposal

President Trump would continue to ease regulatory burdens through personnel choices at key regulatory agencies. He would also continue to take a looser view on regulatory interpretation.

Likelihood

The trend of loosening regulatory policy in the financial sector is very likely under President Trump as his method of loosening regulation through personnel choices and rule interpretations can be done by himself alone.

Market impact

President Trump’s agency personnel appointments and broadly loosened financial sector policies have had a positive impact on the economy and markets. As banks have grown and become more profitable, their capital and liquidity strength have supported credit availability and economic growth.

Healthcare coverage

Joe Biden

Policy proposal

Biden would look to expand ACA (Obamacare) and include a public option. A publicly funded health plan option would compete alongside private health insurers, possibly with the ability to operate at a loss, and thus offer healthcare coverage at a significantly cheaper price.

Likelihood

We believe the introduction of a public option is unlikely, given the probability of a narrowly divided Senate, and Biden’s likely reluctance to end the filibuster. However, Biden may feel enough pressure from the Sanders wing to push for this option aggressively.

Market impact

During the 2009 ACA debate, investors viewed a public healthcare option as inevitably resulting in single-payer healthcare, effectively putting private health insurers out of business. Despite the barriers that implementation faces, the threat of a public option could reemerge and linger as an overhang on managed care. Given the low likelihood that a public option would survive a narrowly divided Senate, the much more likely resulting status quo scenario would be a strong positive for managed care sentiment.

Donald Trump

Policy proposal

Status quo, although with occasional tweets about replacing the ACA. The Trump administration also is arguing that the ACA is unconstitutional in a case to be heard by the Supreme Court during fall 2020. 

Likelihood

Status quo ACA would most likely hold during a second Trump term. Trump likely won’t want to use political capital on changing healthcare coverage. Also, with the current Supreme Court composition, it seems unlikely that the Court will strike down the ACA. If one of the more liberal justices steps down ahead of that case, then the risk to the ACA goes up.

Market impact

A Trump reelection will be perceived as positive for managed care stocks, assuming no changes to the Supreme Court and no major changes in Trump’s rhetoric.

Personal taxes

Joe Biden

Policy proposal

Biden would aim to increase the top income tax rate to 39.6% from the current rate of 37%. Under his proposals, capital gains and dividends would be taxed at a rate of 39.6% for taxpayers with income above USD 1 million. Biden would also impose payroll taxes on income above USD 400,000 and cap the tax benefit of itemized deductions at 28%. Unrealized capital gains would be taxed at death.

Likelihood

Passage of Biden’s proposals are plausible, but would require Democratic control of both houses of Congress and the support of conservative Democrats in the Senate. However, to the extent Democrats do control both the House and the Senate, some aspects of the Democratic Party platform might be implemented through budget reconciliation.

Market impact

Increased revenue would likely be used to fund new spending proposals rather than cutting the budget deficit. The moderate size of proposals should limit the impact. The overall impact would be neutral to modestly negative for equities.

Donald Trump

Policy proposal

President Trump has hinted that he will propose “Tax 2.0” later in the campaign, with the focus on middle-class income tax cuts. We also expect him to propose making the income tax cuts included in the TCJA permanent.

Likelihood

A broader Tax 2.0 bill would be unlikely to pass if the Democrats keep control of the House, although near-term tax relief may be plausible if the adverse economic impacts from the coronavirus pandemic persist. However, we expect concerns over the size of the budget deficit will emerge again next year in the wake of fiscal stimulus in 2020.

Market impact

If enacted, tax cuts would be neutral to positive for financial assets. However, additional cuts could have a modest adverse impact on Treasury yields if markets get more worried about rising government debt levels.

Technology regulation

Joe Biden

Policy proposal

Biden has not espoused any particular policy relative to the US technology sector. However, he has expressed concern in interviews that there has not been enough antitrust enforcement across a number of industries. The US technology industry has not been singled out specifically, although the media often conflates internet and e-commerce companies with technology.

Likelihood

We believe there could be some concern that a Biden administration would be antagonistic to the industry given its “winner take all” and “winner take most” nature. While this is one potential outcome, we believe the strategic importance of the sector to US growth and security would check regulatory zeal.

Market impact

Increased regulatory focus would have a significant impact on valuations of many companies in the IT sector. Additionally, acquisitions, which historically have been a key tool to growth, would be more difficult to execute in a heightened regulatory environment.

Donald Trump

Policy proposal

We believe President Trump’s view on large internet and e-commerce companies is often conflated with “Big Tech.” That said, he has expressed concerns around cybersecurity, the outsourcing of manufacturing jobs to Asia, and intellectual property theft. These issues were encapsulated by tariffs placed on China, the major supplier of electronics and IT hardware as well as having the dual role of key part of the supply chain and key end-market. Looking ahead, we believe additional tariffs on China are likely the most significant policy thrust by a second-term President Trump.

Likelihood

Similar to the situation under Biden, we believe the strategic importance of the technology sector to the US economy will curb the possibility of increased regulation. We also note the possibility of increased tariff activity in a second-term Trump presidency.

Market impact

Although the overall IT sector has outperformed under Trump (despite tariffs), we believe further escalation of tariffs would be seen as a negative as it would likely further impair global trade in an already weakened economy.


 

2020 US elections research archive