Insights & Advice

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Does the stock market like Biden?

Dalton — I don’t have the skill set to persuade someone to vote for one candidate or another. I wouldn’t waste my time, or yours, trying to do so. But I am going to say some things about Vice President Joe Biden’s economic plan. I don’t care about your politics; I care about your money. If I like something about Biden’s economic plan, or don’t, it’s not an attack on your ideology. It’s an attempt to help you position your portfolio for what may, or may not, happen.To say Biden has an economic “plan” is being generous on my part. I’ve held off on writing this column because Biden’s economic plan hasn’t been particularly detailed. All that being said, can we agree that most presidential tax and economic policy is boring? I’ll bullet point the heck out of what we might see in 2021 should Biden secure the presidency and whether it is bullish or bearish for the stock market.— The Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act: I spelled out the whole thing to emphasize the “emergency” portion of the Act. The Act was passed by the House on May 12, 2020. If Biden, as president, passes the HEROES Act on Day One of his term, that’s a seven-month delay from when it was deemed an emergency. It won’t be nearly as effective as if it were passed back in May. But it won’t be too late to push through the portion of the Act that assisted cities and states with funding. I doubt that any stimulus package passed under President Trump would include such a provision. I fear that this funding provision is necessary to prevent the occurrence of a double-dip recession in 2021.

— In the long term, the U.S. needs to put China in check. In the short term, well, President Trump’s very public posturing throughout the U.S.-China trade war was, in part, blamed for the December 2018 stock market crash. Biden as president would spare the stock market from possible Tweet-induced stock market volatility.

— Biden would increase the corporate income tax rate from 21% to 28%. Let’s not play games here: This is nothing but bad news for the stock market. Just because there are fewer words in this bullet point than the others doesn’t mean it’s not a brutal headwind for stock prices.

— Spending is an important consideration. In addition to increasing the corporate income tax rate, Biden plans to use other tax-raising tools to help raise a total of $4 trillion over a decade. According to the Tax Policy Center, “the highest-income 20% of households (who will make about $170,000 or more) would bear nearly 93% of the burden of Biden’s proposed tax increase, and the top 1% nearly three-quarters.” (Though on Sunday morning, Biden either called an audible or made a gaffe by pledging “no new taxes” on Americans making less than $400,000 per year).

Tax hikes, by themselves, aren’t necessarily bad for the economy. It’s really about how that tax revenue is spent Oh, man. This is a toss-up for me. I’d love to hear from readers on this one. Four trillion dollars is a lot of money. Imagine spending that much money on hiring 100,000 people to set up a national contact-tracing program for COVID-19? Or how about a $700 billion pledge to use federal dollars to buy American goods? Those are both ideas Biden has proposed. And then imagine he was able to spend $1 trillion on state and municipal aid (which has support from the House).

I admit it. Biden’s higher tax rates are going to hurt a lot of people I know personally. I am not happy about it but, objectively, that spending is a net positive for the economy.

However, before I give Biden too many kudos, such heavy-handed taxation is not nearly as good an idea as issuing $4 trillion of U.S. debt at historically low rates. Listen, I’m giving Biden the win here for helping the stock market, but it’s not the right way to get the money. I understand that his goal isn’t to help the stock market. But even without that consideration, this isn’t the best way to raise funds. Joe, are you really going to raise taxes after the U.S. gross domestic product was down more than 30% last quarter? The economy remains extremely vulnerable. This is the time to spend, yes. But it’s not the time to tax. Biden for the net-positive win, but it’s a dangerous game he’s playing here.

— Biden wants to raise the federal minimum wage to $15. Yeah, there’s nothing I can say here, for or against, that won’t get me some hate mail. I am personally for a federal minimum wage, but at the margin it is bad for corporate America, yet great for lower-income workers. It’s a short-term/long-term thing. In the short term, it hurts the market. In the long term, it pushes more people toward the middle-class and that is good for the economy. I’m thinking about how to invest post-election and through the following year, so I am going to count this as a strike against Biden.

— Health care, for Biden, should be a right and not a privilege. I can get behind this sentiment, but it doesn’t mean it makes good economic sense. Not that good policy needs to make good economic sense, but that is what I am talking about in this column. Biden’s proposed spending to expand the Affordable Care Act (aka Obamacare) is $750 billion throughout 10 years. Economics is an interesting thing, as it is mostly “if-then” theory. If this happens, then the next thing will happen, and so on. There is a very long string of possible “ifs.” I am a fan of the sentiment behind the Affordable Care Act (although the implementation is a different story), however, it appears as if this would be a drag on the economy.

— For those earning less than $125,000 per year, Biden would forgive undergraduate federal loan student debt that was accumulated at public colleges. Mark Kantrowitz, considered to be an expert on student loans, has testified before Congress about student aid, calculating that about one-third of the $1.2 trillion of outstanding student loan debt would be forgiven. Additionally, under Biden, monthly payments would be capped based on the borrower’s income. I see a lot of bang-for-the buck in this policy, with discretionary income rising and household formation coming easier and quicker.

Bottom line: If Biden raises corporate tax rates from 21% to 28%, that’s going to hurt the stock market more than I care to think about. However, despite my fears, I don’t think that Biden would raise taxes for corporations with haste considering the fragility of the economy. Plus, he already has a long to-do list. I suspect that as investors, we have some time before the threat of higher tax rates materializes. Separately, if we don’t get municipal and state aid, the U.S. economy will suffer more in 2021 and I fear that much of the damage done will be long-lasting. Biden gets the economic nod on that count.

Some people, depending on whether they hate President Trump or love President Trump, will say that he did either a poor job or a good job with the economy based on their political ideology. However, I have to invest based on the facts, and the fact is that the stock market definitely liked Trump as a first-term president and there is not sufficient evidence to argue that it wouldn’t like Trump as a second-term president. The stock market should also like a Biden administration.

If the stock market has meaningful correction between now and the next 69 days prior to the presidential election, it won’t be because the stock market is afraid of one of these candidates. I am not reducing equity allocations due to presidential election outcome possibilities. I advise investors not to make changes in their investment portfolios based on ideological concerns.

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Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to email hidden; JavaScript is required.

This article originally appeared in The Berkshire Edge on August 26, 2020.