Randeep Somel, associate portfolio manager, M&G Investments
Labor Day on the first Monday in September represents the unofficial starting line for final US presidential election campaigning, following the national conventions of both major parties.
While the conventions and election discourse have focused on the character of the candidates, rather than policy, we can begin to decipher what a second Republican term under Donald Trump or the Democratic presidency of Joe Biden would look like.
Biden’s tax plans
The Democrats tend to be a party of higher tax and spending, and Biden’s election would likely to continue this trend. Proposed tax increases on the highest earners and companies would raise an estimated US$3.2 trillion over 10 years.
To put this number into context, the Congressional Budget Office projects that the federal budget deficit for 2020 will be approximately $3.3 trillion, equivalent to 16% of US gross domestic product (GDP). It is the largest deficit, relative to the size of the US economy, since 1945. Even before coronavirus, the budget deficit in 2019 was running at $1 trillion per year.
When interest rates are very low, as they are now, large budget deficits are made affordable by low repayment costs. If they were to rise in the future, however, the higher levels of interest repayments would put a strain on the federal government’s finances.
To fund a fiscal stimulus, Biden’s plan would raise income taxes. Currently, US payroll taxes for social security are only levied at 6.2% (on both employees and employers) on the first $137,000 of annual income. Biden would also apply this rate on earnings above $400,000. The Democratic candidate would also look to raise the top marginal tax rate of income tax – payable on earnings above $510,300 – from 37% to 39.6%.
Biden’s plans and Corporate America
The former Democrat vice-president would also raise the corporate tax rate from 21% to 28%. While this would hit the banking sector, which does not have capital expenditures and R&D spending to offset against, corporate tax at 28% is still lower than under President Obama, when many US corporates left capital overseas to avoid higher domestic taxes.
Biden has also stated in the past that US companies should stop buying back their own shares. While likely to be populist rhetoric, if enacted as policy this could have a negative impact on the US stockmarket as US companies have been big purchasers of their own shares.
More likely is an increase in the federal minimum wage, which the Biden team has been vocal in stating will be raised to $15 an hour. This should boost discretionary spending, but would be negative for small employers and those focused on retail which has already been struggling during the coronavirus lockdowns of 2020.
Climate change and healthcare
The US has signalled its intention under President Trump to remove itself as a signatory of the UN’s Paris Agreement on climate change. The next president will ultimately decide the direction of travel for the world’s largest economy.
Should Joe Biden be elected, the US will almost certainly remain a signatory and put in place a plan of achieving net zero emissions by 2050. Biden has announced a climate plan that would involve spending $2 trillion over four years to significantly increase the use of clean energy in the transportation, electricity and building sectors. This proposal is designed to stimulate economic growth and strengthen infrastructure, whilst also tackling climate change.
Healthcare is another election battleground. Under Biden, policies to support wider access to healthcare, such as a refunding of Obamacare, are likely to be on the agenda. We are unlikely to see a full-scale single national healthcare provider, as proposed by other more left-leaning Democratic candidates.
Trump, meanwhile, has also upped the rhetoric on drug pricing in the US, saying he will bring drug prices – which are generally higher in the US – down to international levels. While this may prompt some price volatility among healthcare stocks as we approach the election, the threat that could have been posed under a more radical Democratic president has passed.
‘Made in America’
Both Republicans and Democrats have been praising labour unions and backing proposals that bring production back from abroad to the US. The American Foundries Act 2020, for instance, has bi-partisan political backing aimed at boosting the domestic production of semiconductor chips.
Ever since announcing his candidacy in 2015, Donald Trump has constantly claimed that the US has detrimental trade deals that he will renegotiate, with the threat of using tariffs and retaliatory action if necessary.
To win back blue-collar voters in swing states such as Pennsylvania, Ohio, Michigan and Wisconsin, the Democrats have now abandoned their previous near full endorsement of international trade deals and have taken a hawkish tone.
While a Biden presidency is likely to be positive for Asian companies that trade with the US, when compared to the alternative, the halcyon days of unfettered international trade under presidents Clinton, Bush Jr and Obama appear have passed.
A ‘blue wave’ in 2020?
It is not just the presidential vote that matters in November’s election, but which party controls both houses of the legislature. The entire House of Representatives and one-third of the US Senate are also up for grabs.
Currently, the Democrats control the lower house and the Republicans control the Senate. To enact his legislative agenda, Biden would need both houses of congress to be Democratic too.
Although polling has consistently shown Biden ahead of Trump, it is worth remembering that nearly all polls predicted a Hillary Clinton victory in 2016. Both the pandemic and civil unrest are likely to make accurate polling even more difficult.
Also remember that the electoral college system means swing states assume a particular importance in the election of the next president. Polling in key swing states still indicates a Biden victory, but is much closer than at a national level.
It’s likely to be close
With the increase in mail-in votes this year, which will take time to count, a repeat of the 2000 election – where there was no declared winner on election night – is possible.
It’s likely to be controversial. A bi-partisan commission chaired by former US president Jimmy Carter in 2005 highlighted that mail-in votes are the easiest way to commit election fraud. If there are any indications of fraud, either candidate could refuse to accept the result and the election could be decided by the US Supreme Court, as it was in 2000. This will be highly politicised.
While the inauguration of the next US president will not take place until 20 January 2021, allowing time to resolve such issues, a disputed result would undoubtedly inject uncertainty into markets until there is a legitimate and official winner.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
M&G are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.