Biden’s big lead in the polls could be partly behind market’s drop and may lead to more weakness

By Top-Bit On Jun 25, 2020

Many Wall Street analysts are warning their clients that a Biden presidency will not be good for the stock market.
The former Vice President and presumptive Democratic nominee has pledged to roll back President Donald Trump's signature tax cut legislation, which has boosted corporate profits.
"This to me is a Biden move," Jim Cramer said Wednesday as the market sold off. "When I see across the board selling today, that's Biden … he sounds like another president that you get that is not favorable to capital. If that's the case, I want to have a little cash."
Looking at data going back to 1951, Bank of America found that when the White House flipped from Republican to Democrat the S&P 500 underperformed over the following three months compared with when a Republican replaced a Democrat in the Oval Office.

Many Wall Street analysts are warning their clients that a Biden presidency will not be good for the stock market. The former Vice President and presumptive Democratic nominee has pledged to roll back President Donald Trump's signature tax cut legislation, which has boosted corporate profits, and if there is a blue wave in November, Democrats will be able to enact major economic changes that may further affect the market in a negative way, investors fear.

Biden is ahead by 14 points in a major new poll from The New York Times and Siena College, garnering 50% of the vote compared with Trump's 36%.

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This has led some to ask whether Biden's jump in the polls is behind stocks' recent turbulence.

On June 8 the S&P 500 briefly turned positive for the year, wiping out its coronavirus-induced losses and hitting its highest level since February 25. But since then investor enthusiasm has cooled, and the index has dropped 5%.

"This to me is a Biden move," Jim Cramer said Wednesday on CNBC's "Halftime Report" as the market sold off. "When I see across the board selling today, that's Biden … he sounds like another president that you get that is not favorable to capital. If that's the case, I want to have a little cash."

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RBC Capital Markets recently surveyed its clients and found that a majority of respondents continue to believe that Trump's reelection would be bullish or very bullish for stocks. And 60% said that a Biden White House would be bearish or very bearish for equities, a significant jump from the 24% of respondents who held that view in December.

The upcoming election was also what worried respondents most about the economic future. Of the group, 73% cited the election, followed by a second wave of Covid-19 cases and a second wave of layoffs at 68% and 63%, respectively.

However, the prospective election is likely just one of several elements creating anxiety among investors. Covid-19 cases are now rising again in the U.S., and unemployment remains high. Uncertainty lingers over the U.S.-China trade deal. Investors are also taking profits in some of their winning trades. In March the S&P dropped 30% in the span of just 22 days — the fastest decline of that magnitude on record — but the recovery since has also been swift. The benchmark index has gained roughly 40% since its March 23 low. Some now think it is a good time to lock in gains.

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Still, November's election remains a big unknown in the market and is no doubt influencing where retail investors, asset managers and institutional investors alike are sending their dollars.

"It is hard to remember an election that has taken place in the United States during such uncertain times," Evercore ISI succinctly summed up in a recent note to clients.

Markets under a Biden presidency

The Street's chief concern over a Biden presidency is what the presumptive nominee's tax plan would mean for corporate America.

The former vice president has said he would raise the corporate tax rate to 28%, thereby rolling back Trump's hallmark 2017 tax reform package that has fueled profits in recent years. Should this pan out, Goldman Sachs said that its 2021 earnings per share forecast for the S&P 500 would fall from $170 to $150. The firm added that a total rollback poses risks to corporate profitability and dividends.

"We believe most investors think the equity market would price in the degradation in corporate confidence from a Democratic controlled government first and would view any pickup in aggregate demand as something to be proven, while a Republican sweep would be viewed as more likely to continue on current tax policy and deficit spending trends," added Morgan Stanley.

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On the other hand, Credit Suisse said that a higher tax rate would be a headwind but not an impediment thanks to other Democratic policies that would "remain supportive for the economy."

Biden has pushed companies to suspend buybacks — a key driver of share appreciation — for at least a year as the pandemic rages on. He wants them to invest not in their own shares but in saving jobs and promoting economic expansion.

Inevitably, of course, there's an element of uncertainty that surrounds the transition from one administration to the next, and the stock market doesn't love unknowns.

Looking at data going back to 1951, Bank of America found that when the White House flipped from Republican to Democrat the S&P 500 underperformed over the following three months compared with when a Republican replaced a Democrat in the Oval Office. The firm also found that the stock market generally performs better when an incumbent is re-elected.

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Just looking at the political stats does not, of course, tell the whole story. The stock market is also driven by long-term market trends and policy decisions by the Federal Reserve.

Trump has consistently highlighted the stock market's performance under his presidency. With the market doing less well now than earlier in his term, he is now arguing that he is best equipped to rebuild the economy.

"I built the greatest economy — with all of the people that helped me and all of the people in this country, we built the greatest economy the world has ever seen. And we're going to do it again. And it's not going to be that long. Okay?" he said during a press briefing on April 27.

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Fear a blue wave?

As Biden has risen in the polls, more and more analysts think that the Democratic party at large will benefit from his strength.

"As Joe Biden's lead over Trump in national and battleground polling has widened, several Senate races have become closer. We are changing our call and now predict the Democrats will take the Senate," financial advisory firm Signum Global Advisors said on Tuesday.

Biden has seen campaign contributions rise following the killing of George Floyd at the hands of Minneapolis police officers. At the same time, Trump's polling has dipped amid ongoing criticism over the administration's handling of the pandemic.

"Survey participants continue to think a Democratic sweep would be a negative event for the stock market, but see a Senate that's tied between Republicans and Democrats as a neutral event for the stock market," RBC found in its survey.

But Morgan Stanley noted that while there might be some short-term underperformance following a blue wave, a united government could ultimately "unlock meaningful opportunity for investors."

– CNBC's Michael Bloom, John Schoen, Nate Rattner and Brian Schwartz contributed reporting.

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Source: cnbc.com