What a Joe Biden win would mean for markets and US business

Some analysts warn a Biden presidency will reduce US share values, especially combined with rising coronavirus infection rates. Picture: AFP

Suddenly, with five trading days to the end of 2019-20, Wall Street has suddenly woken up to the fact that Joe Biden is a hot favourite to become the next president of the US, which dramatically changes the investment outlook for America.

Add that to the increasing COVID-19 infection rate and the sellers hit the market last night.

At the start of the week I had written that in theory these two forces should have caused Wall Street to open the final week of the 2019-20 financial year lower. But the enormous cash sums on the sidelines meant that Wall Street actually started the week at higher levels.

But last night a number of broking houses started to point out to the investment community what a Joe Biden presidency would mean to US markets.

They included Boston-based Christine Todd, who is head of US fixed income for Amundi, Europe’s largest investment manager. Todd travelled to Australia last November to alert markets to what a Bernie Sanders presidency might look like (Biden was then a rank outsider for democratic nomination ).

This week Todd and Amundi put out a special bulletin showing that while Biden might be better for markets than Sanders he would still dramatically reduce US share values, particularly when combined with the higher COVID-19 infection rates.

I will quote from the Amundi warning to explain what is ahead. Almost certainly our market will also be impacted if Biden stays ahead in the polls, albeit that US opinion polls are often wrong.

Trump has not led in a single major poll so far this year. No prior candidate for president has seen a lead this large at this point of the race. The slide in Trump’s approval rating has been most noticeable among senior citizens.

But until the latest fall, the market was not pricing in risks associated with a potential Biden presidency and/or a Democratic sweep of Congress.

Donald Trump is lagging in the polls. Picture: AFP

Biden’s agenda would have sweeping implications for every industry and sector of the economy, with significant investment fallout---particularly if Democrats control both houses.

And Biden’s tax plan would reduce after tax corporate earnings considerably.

President Trump reduced the corporate tax rate from 35 to 21 per cent. Biden’s agenda increases corporate taxes back to an effective tax rate of 26 per cent.

Todd and Amundi calculate that Biden’s tax increase agenda would reduce the S&P 500 earnings estimate for 2021 by roughly $US20 per share, from $US170 to $US150. As a rule of thumb, every percentage point change in the effective corporate tax rate should change S&P 500 earnings by 1.2 per cent, or $US2 per share.

Todd and Amundi concentrated on corporate taxation but the Biden agenda also has a range of increased taxes for higher income individual Americans, including a 12.4 per cent Social Security payroll tax on income earned above $US400,000, evenly split between employers and employees; an increase in the top individual income tax rate for taxable incomes above $US400,000 from 37 per cent to 39.6 per cent; taxing long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 per cent on income above $US1 million and eliminating the so called step-up basis for capital gains taxation.

In addition, Biden plans to cap the tax benefit of itemised deductions to 28 per cent of value, which means that taxpayers in the brackets with tax rates higher than 28 per cent will face limited itemised deductions.

The money raised by the higher corporate and individual taxes will be directed towards increased access to healthcare and support minority communities through a new affordable housing program. There will also be substantial investment in infrastructure.

A key part of the Trump administration has been the reduction in regulation. Biden will re-regulate many areas.

Todd and Amundi say a reversal in the reduction of regulations during the Trump administration may hurt financials, big tech, energy, healthcare, and any labour-intensive business. Longer term, larger industry incumbents with strong competitive positions can most easily absorb increased regulations and pass on increased costs. Past examples of this include tobacco, utilities, managed care, and defence

Todd and Amundi believe Biden may keep a tough stance on China, though with less harsh rhetoric than Trump.

Can Trump come back? It will not be easy. His two best chances are the fact that many middle-class blacks believe the race issue has been hijacked by lawless Americans and are nervous. More importantly California’s ban on independent contracting caused a huge swing to Republicans in a recent Californian equivalent of a by-election. Biden plans to embrace that agenda which will cause huge disruption in the US small business community. None of these matters are on the opinion polling agenda.

We are looking at a different America under Biden and one that will not be anywhere near as favourable to the share market. It will also require some flexibility in Australian foreign affairs and defence policy.

Meanwhile if the Biden/COVID-19 US correction continues, Australian June 30 superannuation balances will be lower.