The US Presidential Campaign Heats Up

Markets are currently pricing is a Biden victory with no majority

François Rimeu (La Française AM) | The Covid-19 crisis has put President Trump in a somewhat difficult situation, which has led some people to question his chances of reelection in November. Indeed, considering what President Trump has accomplished during his term in favor of the corporate sector, there is good reason to worry if some of the measures he put in place were to be cancelled in the event of a Biden victory. But is it that simple?

Just as important to consider is how congress will be divided.

Let us consider some of the main features of Mr. Biden’s project:

  • Raise taxes on corporations, from 21% to 28%, and wealthy households; 
  • Increase the minimum wage (from $7.5 to $15 an hour);
  • Provide $1,700bn in funding for infrastructure and Green New Deal.

In the event of a Biden win, there would no doubt be less political tension across the world, which would be positive.

As far as financial markets are concerned, a Biden win is associated with both positive and negative market impacts. At the time of writing this article, the global perception is that Biden’s program would have a negative impact on equity markets (both in the US and Europe). The main point being that higher corporate taxes could have, according to market estimates, a -20% impact on US equities over his term due to lower earnings. (Source: JPM)

However, for Biden to be able to adopt his program after his election, he will have to obtain a clear majority at congress, otherwise, republicans will most likely block it. As of now, in our opinion, the most likely scenario and the one that markets are currently pricing is a Biden victory with no majority. This scenario is not negative for equity markets, it is broadly neutral but leaves Biden very little room for maneuver.  Even if the Democrats sweep the US presidential election, it remains to be seen how much of those corporate tax reversals will be implemented: Biden’s program was structured before Covid-19 and given the current economic context, business recovery and job growth are likely to be prioritized.