I read somewhere that lower corporate taxes (in the USA) were responsible for about 10 per cent of share price improvement during the recent bull market. That of course doesn’t apply to Canada’s absolutely flat returns on the back of less accommodation in personal and corporate taxes since Trudeau’s win in 2015. Canada’s political problems aside, the US stock market has certainly shown how a friendly Fed and a friendly business environment helps markets. But what happens if Trump loses the election in November of this year?
With a growing likelihood the Democrats win the presidency and Congress, Biden might be expected to reverse at least some of the Trump tax cuts to fill some of the massive budgetary hole. This in turn might likely end up reducing corporate profits. And that certainly wont help already stretched market valuations. That said, not all Democrats are socialist spend n’ tax types. Kennedy lowered tax rates across the board during his tenure. So, here’s hoping…
Pre-election market patterns
Interestingly, the market has a history of selling off before the election is decided if the outlook looks like a Democrat win. Here’s an interesting chart from sentimentrader:
Sentimentrader notes: “During the summer months leading up to the election, the Dow often struggled if the win turned over to a Democrat. Over the next 1-2 months, roughly July-August, any upside was limited. While the Dow ended up doing very well in 1932, all other occasions saw negative returns over the next six months. Based on these suggestions and the recent behavior of markets in correlation to President Trump’s re-election chances, bulls should hope his probabilities improve.”
There are plenty of charts and statistics out there to show that AFTER an election, a win by the Dem’s will be better for stock market returns. I’ve posted a chart below featuring the averages under various presidents–one of several you can find on Google images if you type in a query on the subject.
More significant to the current environment, JP Morgan released some data suggesting that “A Biden victory with a Republican-controlled Senate would boost markets by keeping Trump’s tax regime in place while eliminating his “randomly-timed disruptions from foreign/trade policy”.
Stock investors who are looking for gains into the winter will want Trump to pick it up a bit from now until the election. Thereafter, if he loses the presidency to Biden but maintains a Republican controlled Senate, the odds are good for stocks to continue doing well in an environment of accommodation in tax policies while satisfying some market concerns for forward looking investors.
A Trump or Biden win with a Democrat-controlled Senate would be the worst case scenario for markets, according to all that I’ve read. So there you have it. Now roll them bones, as Rush once sang…and lets see how it plays out.