Insights

Five Policy Debates that May Impact Markets

Matthew Bartolini highlights five policies where Democrats and Republicans are the most diametrically opposed – and how those policies could impact the market.

Head of SPDR Americas Research

The stakes are always high for elections. However, the stakes for the 2020 election feel much higher than usual due to the global pandemic, economic pain, and social unrest. With such an unprecedented election occurring at a time of great divisiveness in the country,1 we highlight five policies where Democrats and Republicans are the most diametrically opposed – and how those policies could impact the market.

Note that delegates to the Democratic National Convention approved their 2020 party platform in August. Republicans are campaigning based on their 2016 platform.

Taxes

Biden: Former Vice President Joe Biden, the Democratic candidate for president, has called for higher taxes for high wage earners and corporations. His plan would raise the tax rate on high earners back to 39.6% (where it was prior to the Tax Cuts Job Act), tax capital gains at the same rates as ordinary income and increase the corporate tax rate from 21% to 28%.2 Higher taxes could curtail earnings growth, as after tax cash flows would be reduced.3

Trump: For the Republican President Trump, lower taxes are expected to remain a focal point in his re-election bid. In May, White House economic adviser Larry Kudlow floated the idea of a 50% discount to the corporate tax rate for firm that bring their operations back from other countries.4 Additionally, in August Kudlow and Treasury Secretary Steven Mnuchin informed the media that Trump favored cutting income and capital gains tax rates.Lower taxes at the corporate and consumer level may spur consumption and economic growth, and benefit firms with high effective tax rates.

Trade/Foreign Policy

Biden: Biden’s platform theme of “Build Back Better” features policies to “Buy American.”6 However, Biden is still likely to adopt a more globalist worldview than Trump – potentially removing some of the tariffs the Trump administration placed on imported goods. With Biden likely maintaining better relations with the World Trade Organization, the potential exists for more global trade alliances and the re-negotiation of the Trans Pacific Partnership.7 These actions would likely be positive for global growth, most specifically in regions impacted by current tariffs.

Trump: Trade policy under a Trump second term will likely be consistent with his first term. Tariffs and bi-lateral trade agreements will likely be the main tools, along with hawkish rhetoric. Trump may move beyond additional sanctions on China, having put a 10% tariff on aluminum from Canada in August.8 Trump’s “America First” ideology on trade is likely to benefit more domestically-oriented market segments.

Clean Energy/Infrastructure

Biden: As part of the former vice president’s “Build Back Better” plan, he will focus on investing in modern and sustainable infrastructure to encourage clean energy. He has pledged to spend more than $2 trillion to achieve carbon neutrality within the US power sector by 2035. Biden also will seek to shift behaviors toward electric vehicles and public transportation, calling for 500,000 electric vehicle charging stations to be installed nationwide.9 Regulations on natural resource production are likely to come back as well (i.e., the Paris Climate Agreement).10 All told, firms focused on renewables and intelligent infrastructure may benefit.

Trump: The Trump administration would likely continue to loosen environmental regulation. Like Biden, Trump has discussed additional infrastructure spending11 as a way to create jobs and foster economic growth. However, the Trump plan emphasizes rebuilding airlines, highways, railroads, and bridges, with little support for clean energy. Trump’s focus on more traditional infrastructure spending may lead to higher commodity prices as demand for natural resources increases, and potentially benefit those producers.

Health Care

Biden: The centerpiece of Joe Biden’s health care reform is creating a public option for Medicare and expanding the Affordable Care Act.12 His health care agenda also centers on COVID-19 pandemic responses, such as supporting US production of personal protective equipment, novel treatments and other medical devices. All measures may be beneficial to device and novel medicine makers.

Trump: Continuing on his current path, Trump likely would focus on further repealing parts, or all, of the Affordable Care Act.13 There has been no mention of a change in COVID-19 response policies. And while the president has made frequent comments on drug pricing, he has been unable to have any sweeping policy changes with only a recent executive order impacting Medicare drug prices.14 Overall, a Trump administration may be slightly more beneficial for the broader health care sector as a whole given the lower headline risk from drastic health care policy changes with respect to universal health care and drug pricing protocols.

Technology/Antitrust

Both the Trump administration and the Democrats have advocated for more technology oversight, particularly with respect to data privacy concerns and social media behavior.15 But differences exist when it comes to regulation.

Biden: On the campaign trail during the primaries, Biden criticized the current antitrust process.16 Along with running mate Senator Kamala Harris (a former prosecutor), a Biden administration may enforce stricter antirust regulation.  The Democratic party,17 in the aggregate, has been in staunch support of this regulation, adding to the potential for a more stringent stance that could hamper large tech-related firms.

Trump: The Trump administration over the past few years has favored more deregulation of the tech sector, via the rolling back of net neutrality18 and broadband privacy rules.19 With bank mergers having moved quickly through the approval phase under Trump,20 a second term would likely continue the trend of loose regulation. Because his first term antitrust actions have primarily been centered on televised hearings of tech CEOs appearing before Congress, a second term may leave big tech alone, meaning minimal headline risks.

Election outcome impacts

The likelihood of these policy platforms being legislated will depend on the outcome of Congressional elections, however. While some policies could be implemented using executive order or with bipartisan solutions, if Congress remains divided, the probability policy becoming law decreases.21

While these five policies are most likely to drive markets, a non-policy issue also may move markets. The results on election night may not be known for weeks22 or contested, given the unprecedented nature of voting during the pandemic. If this does occur, investors girding for gridlock may look to the 2000 election where the president was decided 36 days after the election for insight into market behavior. Back then, at the turn of the new millennium, gold and long-term Treasuries rallied when all the Florida hanging chads23 were counted.24

Starting on September 29th there will be four debates leading up to November 3. In addition to providing more clarity on the candidates’ policies, the debates will surface other issues that could add context to any potential investment positioning opportunities. In our next post, we will check in on the probability of these policy platforms becoming a reality and suggest how to use ETFs to position portfolios ahead of and after the election.

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