MARKET INSIGHTS
October 28, 2020
Tricky Times
By 2X Wealth Group
Markets hate uncertainty, and we can’t remember an election with such potential disparate outcomes. As we speak, the presidential race looks closer than ever, and the Senate majority is in question. Meanwhile the pandemic rages, and the President and Congress can’t agree on a stimulus plan. It’s no surprise stock market volatility has risen.  

Tragically, the pandemic has magnified the wealth gap in our country. While over 200,000 people in the U.S. have lost their lives and millions more their jobs and businesses, the DJIA, S&P 500 and the NASDAQ markets hit new highs. Affluent Americans who have investments in financial assets saw increases in their net worth while many of those who depend on a paycheck are struggling.  

The stark differences between Democrat and Republican plans for the future have greatly increased engagement in the election process. We assess two possible election outcomes and their consequences:

A blue wave with sufficient Senate democrats to enact Biden policies
  • Large government stimulus and infrastructure programs
  • Increase in minimum wage nationwide‍
  • Increased emphasis on green energy
  • Enhancement of Obamacare
  • Improved international relations‍
  • Increase in top income tax bracket from 37 to 39.6%
  • Increase in capital gains taxes for those with incomes over $1mm
  • Increase in corporate tax levels
Practical implications
A Biden administration is likely to push stimulus immediately and delay corporate tax increases to continue to promote economic recovery. Government stimulus programs and infrastructure spending combined with more stable international relationships will likely partially offset the negative impact of tax hikes. Sectors likely to benefit include green energy, infrastructure, materials and industrial companies with high international exports. Tech is caught in the middle – more hurt by higher taxes but potentially benefitting from increased overseas sales.
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The Republicans keep the Senate majority regardless of who is President:
  • Smaller stimulus package and infrastructure plan
  • States will be allowed to set minimum wages individually
  • Slower adoption of clean energy
  • Repeal of Obamacare
  • Continued pushback against China
  • No increase in individual tax brackets
  • No increase in the capital gains rate and a possible reduction
  • No increase in corporate tax levels
Practical implications
Realistically, the Senate controls the pocketbook. In this scenario, the difference we see between a Trump and Biden presidency is related to tariffs and regulations (such as fracking on public lands). With a Republican Senate, tax policy will remain status quo, a relative positive for corporations and the stock market. Less government stimulus risks slowing the anticipated economic rebound. Sectors likely to benefit include defense, technology, biotech, and oil and gas.  
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The 2X Wealth Group Inevitables:
In the spirit of Byron Wien, the vice chairman of Blackstone who is famous for his list of 10 surprises each year, we came up with our own list of 10 inevitables regardless of who wins the presidential election or which party controls the Senate.
  • As a country, the U.S. needs to address those who have suffered the most during the pandemic.
  • The economic status of lower income citizens needs to improve, or we risk increased social unrest and the inability to grow our consumer spending-based economy.
  • With healthcare costs skyrocketing in the last decade, affordable healthcare in the U.S. must happen.
  • The crumbling infrastructure in the U.S. must be fixed.
  • U.S. debt rising as a percentage of GDP and the concomitant printing of U.S. dollars destabilizes our currency and pressures the dollar’s value.
  • The dollar will eventually be replaced as a reserve currency, possibly by a new multi-government cryptocurrency.
  • The recovery in the U.S. will lead to increased inflation this time, partly due to changes in Federal Reserve policy allowing inflation to run hot (above 2%).
  • Legalization of marijuana is a matter of when, not if, and may help fund some of our borrowings.  
  • China will challenge the U.S. as the world’s most important economy.
  • Emerging markets have much to gain from positive population demographics and a weaker dollar.
Like Wein’s surprises, we believe our inevitables have more than a 50% chance of occurring while the average investor might view them as having a 1 in 3 chance of playing out.   

Although election disruptions may cause a near term stock market sell off, it is not all bad. Historically, markets improve once elections are decided, regardless of which party wins. So, these tricky markets suggest a future treat.  

Happy Halloween!

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2x Wealth Group is a team at Ingalls & Snyder, LLC.,1325 Avenue of the Americas, New York, NY 10019-6066 | (212) 269-7757