markets & economy  |  october 2, 2020

U.S. Presidential Election Adds to Uncertain Environment

Candidates offer divergent agendas that could impact markets.

 

Key Insights

  • 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 Stock Fund, 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*

  Joe Biden
Donald Trump
View of T. Rowe Price Investment Professionals
Taxes

  • Would raise corporate tax rate, but not to pre‑2017 levels, to help fund several stimulus initiatives
  • Could push for further tax cuts
  • Higher taxes under Biden would weigh on corporate earnings, though fiscal stimulus could help to moderate this effect
  • If elected, Biden would likely need a Democratic majority in the Senate to pass his tax proposals
  • If GOP maintains Senate majority, Biden’s tax plans would face significant obstacles
Spending

  • Fiscal stimulus to support the economy during the coronavirus pandemic and to aid recovery
  • Spending on research and development, education, health care, and child‑care
  • Fiscal support for municipalities facing revenue shortfalls is a priority
  • Possibility of fiscal stimulus to support the economy
  • Further deficit spending appears likely under Trump or Biden
  • Chief U.S. Economist Alan Levenson says he is less concerned about the growing federal debt because low interest rates are keeping debt service costs manageable and the Federal Reserve’s massive purchases of U.S. Treasury securities help to offset new supply
Trade

  • Less of a focus on the trade balance and punitive tariffs
  • Tensions with China likely to continue, particularly in areas like critical technology development and supply chain security
  • Focus on using tariffs to try to reduce U.S. trade deficit
  • Tensions with China likely to continue
  • Biden could take a more multilateral approach to dealing with China
  • Protecting U.S. intellectual property and addressing tech‑related national security risks posed by Chinese companies likely to be a priority for Trump or Biden

*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%.2 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.

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.

1Budget Model Analysis
2Actual outcomes may differ materially from estimates.

Important Information

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 as of October 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price investment professionals and associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from any estimates, projections and forward-looking statements made.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences. Health sciences firms are often dependent on government funding and regulation and are vulnerable to product liability lawsuits and competition from low-cost generic products. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. All charts and tables are shown for illustrative purposes only.

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