Signs are starting to emerge that the stock market is getting a little worried about how a president Joe Biden would impact corporate profits and by extension the valuations on equities.
“I think it’s [the election] starting to matter a little bit more to daily market performance. I would say really over the past few weeks as we’ve seen the betting odds increase of a Democratic sweep. So we’ve started to hear more discussions around what that means for corporate taxes and as a result, how we should be thinking about our earnings expectations further out. I think there’s also a thought around sector implications. Could we see slightly higher regulation for certain sectors in a Democratic sweep?,” explained JPMorgan Asset Management global market strategist Gabriella Santos on Yahoo Finance’s The First Trade.
The former vice president is currently ahead of President Trump in the presidential race by a whopping 14 points, according to a new poll this week by The New York Times and Siena College. Other polls in recent weeks — such as those from long-time pollster Nate Silver at FiveThirtyEight — continue to show Biden thumping Trump come November.
Interestingly, as findings from these polls (fueled in large part by Trump’s handling of the COVID-19 pandemic) have become prevalent in the past two weeks stock market volatility has returned to the fore after several months of slumber. Meanwhile, the S&P 500 and Dow Jones Industrial Average are down slightly the past two weeks after enjoying a strong rally off the March 23 lows, per Yahoo Finance Premium data.
Recall the former vice president has put forth reversing half of the president’s signature tax cuts, lifting the statutory rate to 28%. Couple that with the prospect for greater regulations under a Biden presidency, as highlighted by Santos, and the market’s angst is understandable at this juncture.
“One of the interesting tendencies of the market is that when an incumbent Republican loses the election, there is actually a pretty decisive period of underperformance in the second half of the year. And now it could be that’s what we’re going to see here from now until the election,” said Ned Davis Research chief global investment strategist Tim Hayes on The First Trade.
Point well taken, Tim.
Over a two-year period the market does better following a Republican win (+8.3%) than a Democratic presidential win (+5.8%), according to numbers crunched by Fidelity that go back to 1789. When Republicans sweep the House and Senate, the two-year average forward return for stocks is an impressive 12.2%. But when Democrats sweep, stocks only return 3.4% over a two-year span.
So, while a president Biden may not instantly hammer your portfolio, the stage could be set for a period of underperformance relative to other asset classes. Stock picking will become more important in such a backdrop, that much is for sure.