Coming to grips with a Joe Biden Democrats ‘blue wave’ in US election 2020

Democratic presidential candidate and former Vice President Joe Biden. Picture: AFP

Investors may soon turn their ­attention to the 2020 elections in the US and the increasing likelihood of a “blue wave” that would give the presidency to Joe Biden and both houses of congress to the Democrats.

President Donald Trump has slipped badly in the polls, and the betting sites. He’s now down by eight to nine percentage points in national polls and is given less than a 40 per cent chance of winning the White House, compared with about 50 per cent in May.

A critical development will be the outcome in the Senate, where the Republicans now have a 53-47 majority. Continued Republican control could stymie Democratic moves to raise taxes and adopt proposals such as a Green New Deal.

“If it’s a relatively close election and Biden wins, I would expect the Senate to remain Republican, but if it’s a blowout, then the Senate falls to the Democrats,” says Greg Valliere, chief US political strategist at AGF ­Investments.

He says the odds of a Democratic “trifecta” are rising as Biden’s lead in the polls widens.

Biden wants to increase the corporate tax rate to 28 per cent, from 21 per cent, and roll back the Trump income tax cuts for high earners.

Valliere thinks there is a reasonable shot that senator Elizabeth Warren would be Treasury secretary under Biden. That would mean tougher regulation of banks, regardless of which party wins the Senate.

Wall Street doyen Byron Wien, who is now senior investment strategist at the Blackstone Group, differs from those who say a Democratic sweep would be a disaster for the stockmarket.

“If Biden is elected, his first priority will be to get the economy recovering to where it was in 2019, and a severe increase in taxes and regulation would work against that,” he observes.

“If the markets thought he would shift to the extreme left, they would be reacting more negatively. The markets seem to have accepted the fact that he could be the winner, but adopted my view that he will move gradually on taxes and regulation.”

Meanwhile, investors lately have tuned out a surge in daily COVID-19 cases and instead took heart from favourable economic data and encouraging news on vaccine development.

The US June employment report on Thursday showed that the jobless rate fell to 11.1 per cent, from 13.3 per cent in May, while non-farm payrolls gained 4.8 million, substantially more than the three million projected.

Many fear that the economy’s momentum will stall as a number of large states reverse some reopening moves. But Wall Street views the COVID-19 crisis as manageable.

Fundstrat’s head of research, Thomas Lee, sees the world as “half-full”. In a note, he writes that the new COVID epicentre states — Texas, California, Florida, and Arizona — are “course correcting” and could be within two weeks of a peak in new cases.

COVID-19 vaccine development, meanwhile, is speeding along, as Pfizer and its German biotech partner reported that all 24 patients in an early-stage trial who got two doses showed neutralising antibodies that were roughly two times the level present in recovered COVID-19 ­patients. The Pfizer results raise the chances that a vaccine will be widely available in 2021.

The S&P 500 now trades for 19 and almost 17 times projected profits in 2021 and 2022, respectively.

This is an edited version of an article which first appeared in Barron’s