With Election Day fast approaching, investors have been concentrating increasingly on economic prospects. Market reactions to the possibility of either a Trump or a Biden presidency will depend less on the candidate and more on the policies expected to emerge from their administration: these will determine how the market reacts before the election, while the actual policies will determine the market’s reaction after the election.
Regardless of how individual investors view either Joe Biden or Donald Trump, markets doubtless have a preference for Trump, for two main reasons:
- Trump is a known commodity. Though Joe Biden has been around for a long time as senator and vice president, he has never been in a position to set policy. Trump bore the same unknowns when he ran in 2016, but after four years of the Trump White House, investors know what to expect. Markets hate uncertainty and like to plan,and this is their basis for preferring Trump.
- As for Trump, however much his tweets and inflammatory rhetoric irritate investors, he has delivered on policies that financial markets like. While his China policy has divided the business community, three other policy moves have met with approval:
- He enacted tax reform in 2017, the kinds of reforms that had been talked about for years under both Democrats and Republicans, but which never made headway during eight years of the Obama administration or eight years under George W. Bush. Not everything in the 2017 tax law can be described as appealing to investors, but it did reduce corporate tax rates toward levels prevalent in much of the rest of the world. The market saw and continues to view this matter as its paramount concern.
- The Trump administration has engaged in considerable deregulation. There is much debate whether he has gone dangerously far, but there is little doubt that deregulation makes business more flexible and profitable –– and that is what markets care about.
- The Federal Reserve (Fed) has lowered interest rates. Though the Fed is independent of the administration, Trump has actively advocated for the low rates that have broad market appeal.
Biden, by contrast, offers reason for concern. Whatever investors may think of his record or his character, they know they cannot forecast his policy agenda. Though that would be true of any challenger to an incumbent administration, the Biden campaign has exaggerated the concern about these unknowns. Throughout the nomination process and the presidential race thus far, Biden has muddled investor planning by talking in apparently two contradictory ways:
- On the one hand, he has presented himself as a centrist and a calming influence. This has definite appeal to investors, whose obsession with ridding themselves of unknowns and being able to plan makes them abhor confusion and embrace anything that appears calming.
- On the other hand, Biden seems to have adopted much of the agenda advocated by the left wing of the Democratic Party, including huge tax increases to finance equally huge government spending plans. Tax increases never appeal to markets. Even so, government spending can cut two ways. The Green New Deal, for instance, would bring enormous contracts for manifold construction and infrastructure work –– some from government spending, some from government mandates. But still, there is investor concern over increasing the already large budget gaps that have grown now for twenty years through three administrations.
Directly after the election and regardless of who wins, the market may well rally briefly, simply because any result will lift the uncertainty about who the country’s next president will be. A Trump victory may give the rally more staying power, but a Biden win will not necessarily drive markets down. If it’s a calming, centrist Biden who emerges after the election, one who expresses caution or equivocation about the left’s agenda, markets could extend a rally. If a stridently left-leaning Biden emerges, then markets would be primed to retreat.
We will see.