The presidential election is less than six weeks away and it carries with it increasing uncertainty of the global financial markets.

Election years have not had higher volatility than other years, but volatility does shift from October to November. I believe investors and corporates are reluctant to take strong directional views on stocks ahead of a major election. This likely pushes October volatility into November as investors delay implementing their views until after knowing the results of the election.

I believe high October volatility is more than just a coincidence. I believe it is a critical period for many investors and companies that manage performance to calendar year-end. Such pressures help boost trading volumes and volatility as investors observe earnings reports, analyst days and management gives guidance for the following year.

COVID-19 fueled the latest jobs recession and forced our economy into a recovery period. All eyes are watching the Fed and its actions on fiscal policy to reflate the economy. With the 10-year and 30-year Treasury yields falling to 0.54 percent and 0.99 percent, respectively, as of March 9, the shortest bear market in history, which began at the onset of the pandemic, has seen the flight of investors from the Fixed Income market to the stock market, helping to drive the recent highs of the Dow Jones Industrials, NASDAQ and S&P 500.

Let us explore what may be expected from the policies of each administration:

Reelection of President Donald Trump/Mike Pence

If the GOP maintains hold of the White House and Senate, we could expect a continuation of the current low tax rates but less stimulus from the government. “…Keith Parker, head of global equity strategy at UBS, sees about 2% upside for the stock market in the election’s immediate aftermath” in this event. (1)

During the Trump Administration, American taxpayers have experienced a drop in federal tax rates on both corporate and individual incomes, and on capital gains. This has led to a rise in stock buybacks, which is one of the factors driving the market today. If Trump wins a second term, we may expect to see another drop in federal taxes. The more probable outcome, given a Democratic house, may be an increase in corporate and personal income tax rates. The other 800-pound gorilla in the room — should President Trump win re-election — is that the stock market could experience increased volatility due to Trump’s trade policies with China. President Trump takes a “confrontational approach” on foreign trade with China and will probably resume his focus on tariffs. (2)

The current administration’s emphasis on deregulation has been great news for the energy and financial industries. If Trump remains in office, we should expect to see these sectors benefit.

President Trump aims to lower drug prices by attacking Big Pharma. Therefore, be aware of the negative implications for corporate bonds on behalf of pharma issuers. On the other hand, a focus on drug prices may better position the corporate bond issuers of health care providers.

If Republicans take the White House and Senate, I believe a “possible refocus on infrastructure legislation” which would favor leveraged credit for infrastructure companies. (3) Due to more spending on infrastructure, we may see an increase in issuance of municipal bonds.

Election of Former Vice President Joe Biden and Senator Kamala Harris

A Biden-Harris Administration is likely to bring forth higher taxes on capital gains, businesses, and higher incomes, with increased regulation, but there may be more short-term stimulus. Keeping these policies in mind, “…Parker, the UBS strategist, thinks that stocks could fall 2% to 5% after a Democratic sweep.” (1)

A Democratic White House will focus its goal on reducing income inequality. Lower- and middle-income households may experience tax breaks. However, losses on corporate profits due to heavy taxation on corporations may lead to long-term inflation. Biden proposes a 7% increase on the top tax rate for corporations. He plans to tax capital gains as ordinary income, instead of the top rate of 20% they are taxed today. (2) Given this capital gains tax increase, I expect a reduction in buybacks, unlike what would be seen under a Trump administration. However, one must also consider the increase in stimulus that may offset the effects of reduced buybacks in the stock market.

I can foresee an era of re-regulation if Biden takes office this November. The oil and gas industries would suffer as Democrats urge for clean energy. Companies found in clean energy ETFs may benefit as the Biden Administration transitions towards a green economy.

Biden plans to restore the ACA and expand health care coverage. If successful, hospitals and health-care facility municipal bonds may reap the benefits of enhanced coverage. (3) If Biden extends Medicare eligibility to age 60 for the unemployed, people may postpone collecting their Social Security and still be able to retire earlier.

Like a Trump Administration, infrastructure spending may increase as well with Biden in office. However, spending will be centered on green infrastructure and an issuance of more municipal bonds may occur in this sector.

Mr. Biden would also make an important structural change. Currently, when people die with unrealized capital gains, their heirs pay income taxes only on gains in value after the original owner’s death and only when they sell. Under Mr. Biden’s proposal, those unrealized gains would be taxed as capital gains at death. That would raise money and discourage people from holding on to assets for tax reasons.

Preparing Yourself for the Road Ahead

The presidential election will play a crucial role in determining the future of America. Each candidate represents the differing ideologies present in our polarized country. The contrasting policy changes will inevitably affect our economy, and with it, your positions and investments. It is important to keep in mind that we are living amid a pandemic. As we race to find the vaccine, we can expect the state of the market to be turbulent. Plan and be disciplined about your asset allocation strategies. When you need to be defensive, cash is your friend.


Mark Martiak is a New York based Investment Adviser Representative and Accredited Investment Fiduciary ® for AGP/Alliance Global Partners. Mark is a regular Contributor for VEGAS LEGAL MAGAZINE who has appeared on CNBC’s CLOSING BELL, YAHOO! FINANCE MIDDAY MARKET MOVERS, FOX BUSINESS NETWORK and has been quoted in THE WALL STREET JOURNAL. Alexa Gounaris provided research assistance.

Such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy. Indexes are unmanaged, and investors are not able to invest directly into any index. Past performance is no guarantee of future results.

Sources:
1) BARRONS: Updated August 10, 2020, 3 Potential 2020 Election Outcomes – and What They Could Mean for Investors, Lisa Beilfuss
2) FIDELITY INVESTMENTS: August 31, 2020, Election 2020: What It Could Mean for Investors, Fidelity Viewpoints
3) LORD ABBETT: August 24, 2020, 2020 Election: A Brief Guide for Fixed-Income Investors