There is at least one Wall Street strategist not on board with the “a president Joe Biden would crush the stock market” narrative that has permeated the virtual halls of investment banks in recent months.
Some 99 days before the presidential election in November, dare we say Bernstein’s Inigo Fraser Jenkins’ new assessment for clients is refreshing? Yes, we shall — although it’s short of saying a president Joe Biden would be amazing for stocks in 2021.
“One of the big unknowns is to what extent can the Fed provide liquidity and the monetary side of the hybrid monetary-fiscal model of policy support that is emerging. A key part of that is the long-term demand for U.S. dollars from international investors. This is tied to the continuation of the U.S.-led post war order. The evidence suggests that the Trump administration regards that U.S.-led order as unnecessary and troublesome, a second term could potentially deal it a fatal blow. Biden, by contrast, seems intent on returning the U.S. to its place at the helm — or at least in a significant driving role — in the key multilateral organizations such as the UN and NATO among others,” Fraser Jenkins writes as one reason for investors not to be totally down on Biden.
Nothing wrong with some form of stability returning to the Oval Office and geopolitics, right? That would at least, on paper, help Corporate America plan their businesses better and articulate those plans to investors clearer. In turn, that could lead to a more consistent stream of earnings and cash flow — both of which investors may be inclined to pay up to obtain.
Meanwhile, Fraser Jenkins believes it would be a while before tax increases from a Biden administration go into effect in large part because of the COVID-19 pandemic’s damaging impact on the economy. So there is no reason for the market to tank on the morning after Election Day.
“While the immediate tax outlook after a Biden victory looks more negative for shareholders, actually long term it could well be less damaging,” he says. “Let's be clear — in the wake of the current crisis taxes are going up globally. It could take more than one election cycle but the direction of travel is clear. Government is going to play a bigger role in markets and economies for a long time.”
All of that isn’t to say the tax issue with Biden isn’t a major longer term concern for investors to contemplate.
Biden has proposed reversing half of the president’s signature tax cuts, lifting the statutory rate to 28%. Investment bank Credit Suisse estimates this change in taxes would increase the effective rate by 4% to 5%, and slash $9 off estimated S&P 500 earnings per share. Goldman Sachs has projected that Biden’s tax plan would lead it to reduce its 2021 earnings estimate by 12%.
Given Biden’s recent proposals around infrastructure and social-safety nets — which are leaning more radical left —there is concern in the market about taxes going back to Obama-era levels under a president “Joe from Scranton.” That would put the stock market at severe risk of a major correction, strategists argue.
It [the Biden plan] means that stocks — all things being equal — would be lower by 25% than they are today. It may not work that way. That is at least the theory,” explained SMH Group CEO George Ball on Yahoo Finance’s The First Trade.
Even Fraser Jenkins isn’t a Biden bull, perhaps he is a realist.
“This is not to say that in the near-term a Biden victory would be relatively better for markets, that is not the case,” Fraser Jenkins says. “But for long horizon asset owners there may be a bigger prize.”