Keeping an Eye on the US Election

There are potentially numerous results, including a Biden victory, a Trump re-election, split Congress or a Blue Wave, and possibly the worst development being a hung election with recounts and legal challenges taking weeks to determine a winner.

A Biden win may likely translate into higher taxes for richer Americans and corporations, with the key issue being capital gains treatment. A meaningful adjustment towards ordinary income tax levels could be considered market-unfriendly in the near term, as investors lock in gains at a lower tax rate initially. Biden may also boost spending in areas such as infrastructure, clean energy, health care and education plus attempt reconciliation with international allies on trade while trimming the defense budget. Regulatory oversight could intensify on polluting industries, and drug companies could face pricing pressure.

A Trump re-election could defer any tax increases and a proposed capital gains tax cut may also cause a selloff if people attempt to take advantage of what may be considered only a temporarily lower rate. Energy may fare better under Trump as could the Banks and Defense sectors, but trade uncertainty could weigh on multinationals.

There is always this ongoing debate as to which party is better for the stock market. Citi analysts believe the key is Congress, not the White House occupant or if there is a change in the executive office versus incumbents. According to history, equities tend to outperform in the third year of the election cycle. However, this does not take into consideration the current COVID-19 or the significant monetary and fiscal stimulus either and investors should remain cautious of political risks going into this period.