What Would a Biden Presidency Mean for the Markets?

Jack Ablin Market Commentary

Polling data currently indicate former vice president Biden is leading President Trump nationally as well as in several key swing states. According to PredictIt, a political outcomes futures exchange, Biden has a 22 percentage-point advantage over Trump to attain the presidency. The markets are beginning to pay attention, now that there are fewer than 100 days left until November 3.

The prospect of a President Biden carries myriad implications, but it should be noted that presidents, when it comes to policy implementation, must stay focused on fewer than a handful of initiatives. From an industry perspective, would-be president Biden would likely concentrate on health care and alternative energy, as well as corporate taxes, given his recent rhetoric.

The current public health crisis could propel a newly elected president to reshape the US health care system. Biden would likely move to reinforce the Affordable Care Act and expand the “public option” enabling the government to negotiate prices with providers, to provide an affordable option to many Americans who find their health insurance too expensive. Under Biden’s plan, middle-class families would also receive a premium tax credit to help them pay for coverage, enabling them to lower their deductible. Negotiated pricing would likely dent health care sector profits because under the current system most cost increases are borne by patients and their employers. The sector’s recent underperformance reflects Biden’s improved chances.

Although both Trump and Biden have complained about prescription drug prices, the risk of drug price reform under Biden is higher. Candidate Biden hopes to let the government more aggressively negotiate prescription prices through Medicare Part D coverage, the prescription drug benefit. He plans on tying domestic drug prices to prices charged in overseas markets. Biden would ban drug companies that do business with Medicare from raising prices for brand-name pharmaceuticals more than the rate of inflation. Large pharma has trailed the market since May, about the time when Biden gained a statistical advantage.

Inspired by the Democrats’ Green New Deal, candidate Biden has been an outspoken advocate for alternative energy’s ability to generate clean, American-made electricity to achieve carbon pollution-free power by 2035. He also hopes to create new jobs in the domestic auto industry manufacturing electric vehicles and related infrastructure, like charging stations. Moreover, Biden supports zero-emissions public transportation. Alternative energy company stocks have responded accordingly, with names like Tesla, Vesta Wind Systems and First Solar outperforming the broad market in line with Biden’s election advantage.

Meanwhile, traditional energy companies could feel the heat from a Biden White House, as likely policy initiatives favor green energy. The presidential hopeful would seek to tax carbon emissions, end new oil & gas leases on federal land and terminate offshore drilling. Biden has distanced himself from some of his previous anti-fracking statements, but his contempt for shale oil production is widely known. Among all the industries, it seems that foreign and domestic fossil fuel companies would be the most disadvantaged by a Biden presidency. Oil investors have bristled at the prospect of a Biden victory, which has been reflected in the sector’s underperformance.

Candidate Biden is on record saying he would raise the corporate income tax rate if elected; however, he would raise it from 21 per cent to 28 per cent, not back to the 35 per cent rate that was in place in 2017. Raising the corporate tax rate could potentially disadvantage domestic profits, although Biden would go after industries that pay lower taxes historically, like tech. That said, increased scrutiny of America’s tech giants, including increased regulation of social media companies, while a risk under either White House, is likely to be relatively less aggressive under a Biden regime. Social media stocks have fared well in recent weeks as a result.

The banking sector has enjoyed a favorable regulatory environment, a huge tax cut and friendly Fed policy under President Trump. Biden proposes doubling the long-term capital gains tax from 20 per cent to 40 per cent, hurting banks’ trading and asset management customers along with their own income statements. Investors fear banks could come under increased pressure in a Biden administration, especially if he taps Elizabeth Warren, an outspoken big bank critic, to be his Treasury Secretary. The banking sector, beginning to sense the Biden vibe, has underperformed in recent weeks.

Biden’s power to enact the aforementioned measures relies in large part on Democratic control of the Senate. PredictIt suggests the Dems have a slight edge there also. Assuming they’re independent events – a big assumption, in our view – the likelihood of a Democratic sweep of the White House and the Senate is currently about 38 per cent. Adjusting for the fact each outcome is more closely linked, the likelihood rises to just under 50 per cent in our estimation. US large caps have not responded to the threat of a Democratic sweep, which based on tax legislation alone could cost investors as much as 15 percentage points in valuation, in our estimation.