Would a Biden presidency cause stock markets to stall? That’s what some investors expect as equities soared under the Republican president. However, through Biden’s infrastructure stimulus, healthcare expansion plans and new economic tilt, it could allow markets to power on, particularly as monetary policy remains accommodative.
Infrastructure And Healthcare In Focus
Biden’s $2 trillion infrastructure program is centered on applying clean energy technology to power generation, the building sector and transportation over four years.
His goal is to make U.S. infrastructure more durable by cutting dependence on fossil fuels. He emphasizes the jobs such changes would create, citing the potential to become a green technology leader.
Biden would also exhort the auto industry to step up its commitment to electric vehicles and help by funding research and development in areas such as electric transportation and 5G networks.
As compared to the Green New Deal espoused by Rep. Alexandria Ocasio-Cortez (D-NY), Biden’s infrastructure plan strikes a balance between moderate and progressive solutions. His ideas to expand healthcare in the U.S. similarly call for compromises between the two factions of the Democratic Party.
Biden champions a public option that allows anyone seeking coverage to buy a government plan. While he rejects the costly Medicare for All solution sought by his progressive peers, he supports expanding Medicare by lowering the eligibility age to 60.
Paying For It All
Despite leaning to the political center, Biden’s plans still come with hefty price tags. To foot the bill, he expects to raise corporate taxes, bump up personal taxes on high-end earners and increase borrowing.
Corporate leaders might already worry that a President Biden tax hike would significantly drag down earnings. But some offsets are expected.
Biden’s spending programs are intended to drive innovation and jobs in emerging technologies. His preference for international cooperation should stabilize trade relationships and give companies more visibility on planning and commitments.
For instance, if corporate taxes were increased from 21% to 28%, Goldman Sachs estimates earnings could drop by 12%. A less draconian increase to 25% would reduce earnings by 6%. However, trade tension and tariffs have been a key headwind for earnings. JPMorgan estimates that it could have clipped 7 to 8% off earnings last year.
One of the catalysts for President Trump’s corporate tax cuts was to encourage patience from U.S. companies as the administration amplified trade tension with friends and foes. But after years of increasing tariffs, the economic drag continues and little has improved in some key relationships.
A longtime coalition builder, Biden will opt for a multilateral approach with allies. Cooperation between the U.S. and Europe should make it harder for China to resist pressure to reset the trade relationship. While President Trump deserves credit for drawing attention to trade inequities, sustained progress is unlikely without the multilateral framework Biden is likely to bring.
Winners And Losers
While Biden’s economic policies could benefit a wide slate of sectors embracing greener practices and global partnerships, his party ideologies will take their toll on some industries that have benefited under the current administration.
The Democrat’s commitment to clean energy will create opportunities for the auto sector and transportation in general, as incentives encourage more electric vehicle output. The supporting technology will be boon to semiconductor manufacturers, electrical component suppliers, artificial intelligence applications and software developers.
As the U.S. gears up to reduce emissions, the oil and gas industry will feel the pinch. However, Biden has said he would not outlaw nuclear energy or fracking. He would instead explore technology to capture carbon output from fossil fuel plants while polluters pay a carbon tax.
Renewable energy should see a resurgence. Increase in wind and solar projects should create jobs and demand for machinery, construction and for engineering companies to build out the platforms.
Deescalation of trade tension would benefit exporters that depend heavily on overseas revenue and domestic importers that have significant offshore production. Auto companies, heavy machinery and healthcare equipment manufacturers are obvious beneficiaries.
The healthcare sector would expand as more Americans gain insurance. This trend would also benefit pharmaceuticals companies, although price scrutiny will increase.
The defense industry would lose out under Biden. While companies in the sector grew under President Trump, it’s much more likely to see leaner budgets under Democratic leadership.
Biden would champion an increase in the federal minimum wage. This idea is popular with two-thirds of Americans and research suggests that minimum wage bumps should increase consumption.
The most vulnerable sectors to a wage floor are retail, restaurants, hospitality and leisure. Some may offset with automation or price improvements, but those that can’t will see margins dip.
How Likely Is A Democratic Sweep?
To deliver on all these promises, the Democrats would need to not only win the Presidency and hold the House, but would also need to take control of the Senate. That would require picking up three seats. Over the last month, Predictit, a prominent political betting platform, has assigned a 55-58% probability to a Democratic sweep.
Probability of Democratic Sweep
Source: Predictit, Victoria University of Wellington
So far, markets seem unfazed by Biden’s popularity. It’s still early stages and a Biden Presidency may do little to disrupt the status quo if the Senate remains Republican. History suggests that markets like split government, primarily because it mutes political overreach.
S&P 500 returns since 1928 under different Presidential / Congressional control
Source: Bloomberg, SLC Management
S&P 500 returns since 1928 SLC MANAGEMENT