Candidates offer divergent agendas that could impact markets.
- Investor anxieties are running high in an election year already fraught with tension amid the economic damage from the coronavirus pandemic.
- Salient policy differences between the presidential candidates could have important implications for investors, particularly involving taxation.
- T. Rowe Price investment professionals provide their views on potential implications for the IT, health care, financials, industrials, and energy sectors.
There are salient policy differences between the presidential candidates in the 2020 U.S. election that could have important implications for investors. Political races further down the ticket are significant, too, as the balance of power in the Senate will influence the extent to which the next president, whether it is Democrat Joe Biden or incumbent Republican Donald Trump, can accomplish his agenda.
Investor anxieties about politics are running high in an election year already fraught with tension amid the economic damage from the coronavirus pandemic, which triggered enormous market swings earlier in 2020. However, David Eiswert, portfolio manager of the Global Focused Growth Equity Strategy, contends that many postelection policy and regulatory risks “came off the table” after Biden, considered more of a moderate Democrat compared with his chief competitors, emerged as his party’s presidential nominee.
Stark Contrast in Tax Policy
Taxation illustrates one of the widest policy divergences between the two candidates. Biden has proposed raising corporate taxes to halve the tax cut enacted by the Tax Cuts and Jobs Act (TCJA) of 2017, which was a key policy victory for the GOP. Biden’s plan would involve increasing the corporate income tax rate—currently a flat 21%—to 28%. That would still leave the rate meaningfully lower than the pre‑TCJA rate of 35%. The Democratic candidate would also boost taxes on the foreign income of U.S. companies and institute a form of alternative minimum tax for corporations.
Biden has earmarked his tax proposals as revenue‑raisers for his spending plans, which include funds for research and development, education, health care, and child‑care. According to a Penn Wharton Budget Model analysis of Biden’s spending and taxation policies,1 the new outlays would total USD 5.4 trillion over 10 years versus USD 3.4 trillion in new revenue, potentially resulting in USD 2 trillion in deficit‑financed spending in the next decade.
Candidate Policy Menu
Fiscal and trade proposals of Biden and Trump*
*Proposals may shift leading up to the election or afterward. The balance of power in the Senate and other factors will likely determine the next president’s success in accomplishing the parts of his policy agenda that require legislation.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of a group of T. Rowe Price investment professionals. Views are as of October 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. All investments are subject to risks, including the possible loss of principal.
Tax Hikes Could Weigh on Earnings
These tax hikes could reduce after‑tax corporate earnings, and it’s unclear whether current equity and corporate bond prices are discounting the possibility of a Biden win and higher taxes. “Biden’s tax increases would impact equities more directly than corporate credit, probably hitting the wildly profitable giant tech stocks the hardest,” says Mark Vaselkiv, T. Rowe Price’s chief investment officer (CIO) for fixed income. A tax hike would not necessarily hold back growth, Vaselkiv adds, noting that U.S. corporate earnings and the broader U.S. economy both continued to grow after tax hikes during the Bill Clinton and Barack Obama administrations.
David Giroux, T. Rowe Price CIO of equity and multi‑asset, and head of investment strategy, estimates the tax rate hikes proposed by Biden could collectively reduce after‑tax profits for companies in the S&P 500 Index by 9% to 11%. However, some industries could benefit from increased spending.
Eiswert agrees that U.S. companies would experience an “earnings reset” if the Biden tax plan passed, though he also believes that the effects would be “manageable and likely offset, in part, by fiscal stimulus.”
Tax policy would likely be little changed in a second Trump administration term, our investment professionals believe. If Republicans keep control of the Senate, lawmakers could even seek to cut corporate taxes below their post‑2017 rates, says Eiswert. However, enacting another tax cut would be very difficult with Democrats in control of the House of Representatives. Trump might also continue to advocate for a payroll tax holiday, which he describes as a payroll tax cut. GOP legislators have shown limited interest in this measure due to the importance of the payroll tax in funding Social Security.
Deficit Spending Expected to Continue Regardless of Election Outcome
U.S. deficit spending to fund pandemic relief this year is driving the deficit and the level of government debt outstanding rapidly higher. However, absent a Democratic electoral sweep of both houses of Congress as well as the presidency, Biden’s tax increases would likely face significant obstacles. An inability to pass tax increases could result in even more deficit spending. T. Rowe Price Chief U.S. Economist Alan Levenson argues that federal deficits will remain high no matter who is president.
The Congressional Budget Office recently projected that outstanding federal government debt will reach 98% of gross domestic product (GDP) in 2020 and exceed 100% next year. Nonetheless, Levenson’s outlook for the U.S. fiscal position is sanguine, noting that the Federal Reserve’s massive purchases of U.S. Treasury securities—currently USD 80 billion per month—are offsetting much of the new supply.
Debt service costs are also low, Levenson says. “Interest rates are so low that federal interest expense as a percentage of GDP has barely risen,” he explains. While Biden’s proposed USD 2 trillion in net spending over the next 10 years may appear high, the government spent more than that in the second quarter of 2020 alone on pandemic relief programs, Levenson notes.
Longer term, Vaselkiv says, “we may be arriving at a place where fiscal deficits don’t matter.” This, he adds, is because the U.S. may be moving toward a situation like Japan’s, where the government has taken on a huge debt load since the late 1980s in an effort to stimulate economic growth. Longer‑term secular drivers of growth, such as demographics, do not bode well for the U.S. economy as the population ages, Vaselkiv adds.
Municipalities in Need of Fiscal Assistance
In terms of more immediate fiscal needs, Vaselkiv asserts that the economy is weakest at the state and local levels, where governments need help to mitigate cuts in essential services amid quickly declining revenues. He believes that Biden would likely seek additional funding for states and municipalities.
Trump so far has advocated against similar support. This partisan dynamic means that the election outcome could help determine the credit quality of municipal debt for years to come as the economy recovers from the pandemic, Vaselkiv says.
A Democratic “blue wave”—an electoral sweep of the presidency and both houses of Congress—would raise the prospects of enacting additional fiscal stimulus at all levels in 2021. If Biden is elected president but Republicans retain control of the Senate, Vaselkiv predicts that political gridlock likely would delay or diminish further stimulus.
Tensions With China Resonate Across Parties
Quentin Fitzsimmons, a London‑based T. Rowe Price international fixed income portfolio manager, says he is not convinced that a Biden administration would try to materially improve relations with China.
“Tensions with China seem to resonate across the political divide,” Fitzsimmons says. He believes Biden would maintain pressure on China to address concerns about intellectual property rights in the technology sector. In a second Trump term, Fitzsimmons says that investors should expect to see more of the same policies toward China—including the use of tariffs to try to reduce the U.S. trade deficit.
Levenson says he believes that Biden would focus less on the trade balance than Trump and would not place punitive tariffs on countries typically viewed as trade partners, like Canada. However, Levenson asserts, Biden will face the conundrum of advocating for free trade and moving more manufacturing onshore to the U.S., which the candidate has emphasized in his central policy proposals.
Eiswert also believes that Biden would likely take a relatively tough stance on China, although he says that he thinks the Democrat would pursue a “more multilateral approach,” pushing for reforms but “with more of a focus on the long term.”
T. Rowe Price investment professionals also have specific views about how the election outcome potentially could affect some key sectors. These include:
Information Technology and Communication Services
Ken Allen, portfolio manager of the Science & Technology Equity Strategy, believes that sector fundamentals are likely to be driven more by the ongoing digitalization of the economy than by the outcome of the election. Regardless of who wins the presidential election, the mega‑cap U.S. technology companies are likely to remain in the regulatory spotlight both at home and in Europe.
The real, though difficult to quantify, risk of government regulation should not be new to technology investors, Allen observes. Antitrust issues and data privacy concerns, he notes, have driven pronounced swings in these stocks in recent years but have not prevented them from posting strong gains.
Technology trade tensions between the U.S. and China are not likely to recede under either administration, Allen says, as both presidential candidates appear likely to seek to protect U.S. intellectual property rights and address technology‑related cybersecurity threats posed by China.
The two candidates’ approaches to these issues could differ. “It’s tough to say how U.S.‑China relations would evolve in a Biden presidency,” Allen says, “but if volatility were to lessen, that could be a positive for technology companies that are perceived as having some exposure to trade tensions between the two countries.”
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45‑106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.
Morningstar Awards 2020©. Morningstar, Inc. All Rights Reserved. Awarded to T. Rowe Price for 2020 U.S. Morningstar Exemplary Stewardship and to Jerome Clark for 2020 U.S. Morningstar Outstanding Portfolio Manager, U.S.A.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.