Biden vs. Buybacks? What his Presidency Could Mean For The Stock Market
The election is less than 3 months away, and as social unrest has grown in 2020, so has the Democratic frontrunner Joe Biden in the polls. According to Polls (and Las Vegas Sportsbooks), incumbent Donald Trump saw his 54% chance of re-election drop to a current 33% chance since 2020 began.
History reminds us polls aren’t always accurate (they were wrong in 2016) and anything can happen. Three months may seem short for a baseball season, but it’s a lifetime in politics. In either case, investors need to prepare for a very real possibility of change in the White House.
Here’s our view on possible headwinds and tailwinds of a regime change:
Headwinds
Tax Increase proposals by Biden & co are the core argument behind predictions the stock market will drop. A few of the items on the table (per taxfoundation.org) are:
Increasing corporate taxes from 21% to 28%
Increasing capital gains and dividend rates for income over $1 Million
Increase the top personal tax rate to 39.6%
Increase the wage base for social security tax
Limit itemized deductions for individuals above the 28% tax bracket
You get the idea- corporate and individual earnings immediately drop due to higher taxation, putting pressure on stock prices.
Additionally, investors might consider selling shares to take advantage of the 2020 capital gains rates if selling in 2021 will be more expensive. We expect a volatile November and December, as tax planning promotes portfolio changes.
Increased regulation is always a concern for businesses, and it’s also on the table. While President Trump repealed laws like an 8-year-old on Christmas morning, Biden will likely sign multiple executive orders reinstating old business restrictions.
American companies are no stranger to changing legislation every few years, but it does come with a cost of compliance. Some Wall Street firms estimate this would cost another 2-3% from company net incomes.
Smaller Shareholder Returns?
Within 3 days of the market low, Biden publicly called for company CEO’s to end their stock buyback program. The suggestion being made was that companies should instead use that money to keep their employees on board, which is a noble idea. Corporate boards who voted to suspend buybacks must feel a twinge of regret though, as many stocks have rallied double or triple digits off their lows.
Stock buybacks have been the new target in Washington. The lawmakwers’ public push is for excess corporate cash to be used to increase wages or expand the workforce, rather than reward shareholders. It’s unlikely that buybacks are made illegal, but they’re certainly a threat to be publicly frowned upon.
Tailwinds
Stimulus bills could offer a one-time offset to tax hikes. The early Biden proposal does include spending measures. The Infrastructure bill alone is estimated at nearly $1 Trillion for the economy. Health care and clean energy initiatives are expected as well.
Tax Credits for child care and family caregivers would apply to the majority of the population and could help. These are projected to be between $5k-$8k each and could help spur the economy and productivity.
Larger Dividends? One likely outcome (if buybacks slow down), would be larger dividend payments. Companies committed to returning profits to shareholders could simply re-direct money from buybacks to larger dividends. In a time where interest rates are nearly 0%, an income boost would be welcomed by most investors. S&P 500 dividends have historically grown around 5% annually, but that rate could increase.
Stock Market History suggests a Democratic president wouldn’t be a bad thing: Although conventional wisdom says Wall Street favors business-friendly Republicans, Since 1928, the S&P 500 has averaged 13.3% annually under Democrats, compared to 7.7% under Republican presidents*.
In Short- we expect political rhetoric to potentially move markets into the election and investors should brace for a volatile November and December. However, it’s important to remember that the White House has far less impact on the stock market than the overall economy. With interest rates at 0%, a recovering economy after Covid, and technology improving lives everywhere, we don’t expect a large market crash. Ultimately, things should keep progressing along as they always have, and stocks are historically the best way to participate in the growth and ingenuity of the human race.
*InvesTech Research