Tom Steven­son Novem­ber’s win­ner will have lim­ited op­tions

‘Bi­den has the clos­est thing to a free pass that any chal­lenger could have hoped for’

The Daily Telegraph - Business - - Business Comment -

Wall Street’s dra­matic re­cov­ery in April and May has run out of steam. You don’t have to look far for why that might be. The resur­gence of Covid-19 in­fec­tions, to the ex­tent that the US now ac­counts for a quar­ter of all cases, would be rea­son enough to worry that the mar­ket’s rally has gone too far, too fast. But there’s some­thing else prey­ing on in­vestors’ minds as we pass the mid-year point – Novem­ber’s pres­i­den­tial elec­tion.

Six months ago, the con­ven­tional wis­dom made Don­ald Trump a shoo-in for a sec­ond term. A his­tor­i­cally low un­em­ploy­ment rate and the stock mar­ket hit­ting new records is the tra­di­tional recipe for an in­cum­bent’s re-elec­tion. But as Bill Clin­ton’s elec­tion strate­gist James Carville said, when in­struct­ing cam­paign work­ers what to fo­cus on in 1992, “it’s the econ­omy, stupid”. He was right. Ge­orge Bush se­nior soon found out that a sky-high post-GulfWar ap­proval rat­ing was no de­fence against ris­ing un­em­ploy­ment on elec­tion day.

If re­ces­sion were the only con­cern for the Trump cam­paign this year, the pres­i­dent might still be ahead in the polls. But this year’s mix also in­cludes a woe­fully mis­han­dled pan­demic re­sponse and a tin-eared if not overtly racist re­ac­tion to the killing of Ge­orge Floyd. The oc­ca­sion­ally tongue-tied sep­tu­a­ge­nar­ian Joe Bi­den may not be cen­tral cast­ing’s first choice to un­seat Amer­ica’s mav­er­ick pres­i­dent, but he has been handed the clos­est thing to a free pass that any chal­lenger could have hoped for. Trump’s ap­proval rat­ing, at less than 40pc, is close to the low point of his time in the Oval Of­fice. Bi­den now en­joys a near dou­ble-digit opin­ion-poll lead.

In­vestors are con­cerned about what a Bi­den pres­i­dency might look like. On the face of it, and from a nar­rowly mar­ket-fo­cused per­spec­tive, they are right to be con­cerned. Gold­man Sachs cal­cu­lates that the dif­fer­ence be­tween Trump and Bi­den can be mea­sured as a $20 (£16) fall in 2021 earn­ings per share for the S&P 500 in­dex from $170 to $150. Let’s as­sume that in­vestors re­spond to that by also re­duc­ing the mul­ti­ple of earn­ings they are will­ing to pay for a share of the ac­tion and we might ex­pect Wall Street’s bench­mark to fall from last month’s peak of just over 3,200 to let’s say 2,700 (18 times $150). That’s nearly 15pc lower than the S&P 500 stands today.

If sen­ti­ment were to slide fur­ther, per­haps on the back of a sec­ond wave of in­fec­tions or a de­te­ri­o­ra­tion in re­la­tions with China, even that might seem op­ti­mistic. Three fifths of in­vestors polled in a re­cent sur­vey by RBC Cap­i­tal Mar­kets said Bi­den would be bad for the mar­ket com­pared with just 24pc when it seemed a more re­mote pos­si­bil­ity last December. Nearly three quar­ters (73pc) said the elec­tion was a con­cern, higher than the 68pc who cited Covid-19 and 63pc who were fo­cused on ris­ing un­em­ploy­ment. What are in­vestors wor­ried about? First, and fore­most, tax. Bi­den has made clear that he would re­verse the 2017 Trump tax cuts that have done so much to drive the stock mar­ket higher in the pres­i­dent’s first term. For com­pa­nies, that would mean hand­ing back half of a re­duc­tion from 35pc to 21pc in the statu­tory rate, al­though the im­pact on the ef­fec­tive rate most busi­nesses ac­tu­ally pay would be smaller. For wealthy in­di­vid­u­als, it would in­volve a re­turn to the pre­vi­ous top rate of 39.5pc (from today’s 37pc) – hardly puni­tive by Euro­pean stan­dards and only af­fect­ing peo­ple earn­ing more than $400,000 a year.

Some com­pa­nies would also find them­selves squeezed by a pro­posed in­crease in the min­i­mum wage to $15 an hour from a barely life-sus­tain­ing level of around half as much today. There would be sec­tor-spe­cific challenges too, with Bi­den likely to re­verse Trump’s en­vi­ron­men­tally-blink­ered sup­port for fos­sil fu­els and to in­crease the squeeze on big tech.

It would be wrong, how­ever, to see the elec­tion as a black and white con­test be­tween a mar­ket-friendly Trump and the work­ers’ cham­pion Bi­den. The Demo­cratic chal­lenger rep­re­sented Delaware in the Se­nate be­tween 1973 and 2009, a state that fa­mously pro­vides big busi­ness with a tax-friendly home. He was prob­a­bly more left-lean­ing than Barack Obama, un­der whom he served as vice-pres­i­dent for eight years, but he is no Bernie San­ders or El­iz­a­beth War­ren. The $1.3 tril­lion of in­fra­struc­ture he has pen­cilled in over 10 years is also long over­due and rep­re­sents a mas­sive op­por­tu­nity for job cre­ation.

A clean sweep for the Democrats would open the door to a more chal­leng­ing agenda from an in­vestor’s per­spec­tive. Demo­cratic con­trol of the White House, Se­nate and House of Rep­re­sen­ta­tives has typ­i­cally been as­so­ci­ated with much lower re­turns than dur­ing pe­ri­ods when the Repub­li­cans con­trol all three pil­lars of gov­ern­ment (3.4pc ver­sus 12.2pc in the two years fol­low­ing elec­tions).

The more com­mon bi­par­ti­san grid­lock in Wash­ing­ton brings the av­er­ages much closer to­gether – an 8.3pc gain in the two years fol­low­ing all Repub­li­can wins ver­sus 5.8pc for the Democrats.

The need to con­tinue with fis­cal and mon­e­tary stim­u­lus, to build a ro­bust med­i­cal in­fra­struc­ture and to man­age $18tril­lion of fed­eral debt will tie the hands of who­ever wins in Novem­ber.

Tom Steven­son is an in­vest­ment direc­tor at Fidelity In­ter­na­tional. The views are his own. He tweets at @tom­steven­son63.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.