Predicting the stock markets on the eve of Election Day is as much about personal belief as facts.
The prospect of increased taxes and its impact on corporate earnings can be a powerful factor in deciding electoral outcomes in the world’s most powerful democracy. With poll pundits going into overdrive to predict the outcome of the US Presidential Elections, anxiety is writ large on the faces of the nation’s investor community. President Donald Trump’s claim that in the event of a Joe Biden victory, “the stock market will crash” is par for the course. He has been at it since his visit to India in February. While this could be dismissed as yet another ploy to drum up paranoia, historically the markets have almost always favored the incumbent. So, Trump may not be entirely wrong either.
Watch: Trump Claims The Stock Market Will Crash If Biden Wins
The odds of a stock market collapse have always been hotly debated in the United States. Trump has a reputation for being fiercely pro-business. The US economy and its lopsided trade balance with other countries, notably China, are perhaps the only things he truly cares about. On his part, Biden too has promised a large spending boost to accelerate US economic growth. However, fears of an Barack Obama-like tax hike are making the markets jittery.
Fears of an Obama-like tax hike are making the markets jittery.
What The Experts Say
That Trump has a penchant for stoking controversies is no secret. His lack of finesse at the recently concluded presidential debates evoked much criticism in the press and early projections showing Biden in the lead seem to have unnerved him. Now that polling is well underway, Trump is doing all he can to keep his chances alive, including organizing carefully-choreographed appearances in swing states. While most experts have called him out on it, Trump isn’t the only one betting on a stock market slump. Investment guru, Mark Mobius has said that US and global stocks were in for “real problems” if Trump didn’t make it. He was quick to add that he “was stating the fact” and his comments were not to be taken as “a political statement”.
Watch: Trump’s Election Prophesized In 2011
The S&P 500 has held up well despite a round of sell-offs seen over the last few days. However, Mobius has claimed that it was only a matter of time before the markets started to fall. He foresees a “double-top” pattern where stock values can fall precipitously after two consecutive peaks. While critics might accuse Mobius of being on the Republican payroll, his case was bolstered by a bipartisan team of analysts at JP Morgan, the country’s largest bank by market capitalization.
According to Dubravko Lakos-Bujas, Chief US Equity Strategist at the New York-based giant, the S&P 500 is expected to rise by 13% if Trump returned to the White House. On the other hand, the bank predicts a largely neutral effect should Biden win.
The S&P 500 is expected to rise by 13% if Trump returned to the White House.
The Tax Wars
Like Mobius, the JP Morgan researchers have based their assessment on the negative impact of Biden’s proposed tax hikes. The former vice president has outlined an ambitious agenda that includes raising the minimum wage to $15 an hour and investing $2 trillion in renewable energy projects, boosting blue-collar jobs while making good on US commitments to cut greenhouse emissions. Biden has also promised a waiver of student loan debt and subsiding college education. This would manifestly necessitate a drastic rollback of the tax cuts provided by the current administration. The cost of this ambitious vision will be a bitter pill for corporate America to swallow, if only in the short term.
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Trump has dismissed Biden’s plan as a gamble that would be “risking millions Of American jobs”. This stance could alienate the electorate in southern states like Louisiana and Texas where Trump is already in the lead. More importantly, the impact on inflation on an economy is still recovering from the effects of the pandemic has not yet been quantified by the Biden campaign. Biden’s move to raise the corporate tax rate to 28% – up from 21% currently- is being seen as unrealistic even as US businesses have been forced by falling revenues to lay off record numbers of workers. Wealthy Americans tax payers can expect to up to 16% more under the new tax regime proposed by Biden. Proponents argue that a rise in tax rates does not automatically slow the rate at which Americans save.
According to UC Berkeley Professor Emmanuel Saez, the impact of tax increases is being exaggerated. He claims that there was no “discernible negative effect on growth” after Obama raised the tax rate in 2013. Trump’s argument that tax breaks for the richest 1% of Americans can encourage investment isn’t grounded in reality, argues Saez. Unless the income tax rates were hiked to 60% or more, it would have little effect on the earnings or saving potential of the richest Americans.
Why Wall Street Isn’t Impressed
Compared to Trump, Biden is expected to adopt a moderate stance on matters on national importance including foreign policy and trade.
In an alternate reality, this predictability factor would have weighed heavily in favor of a Biden presidency. However, it is a fact that Trump’s tax cuts put more money in the hands of businesses and ordinary Americans than Biden is likely to. In sharp contrast to successive Democrat administrations, Trump has expanded federal spending despite not having the fiscal room to do so. This is likely to be seen by the stock markets as proof of better returns over the long term.
A Stock Market Crash is inevitable if Biden wins.