The November election just months away. With this, Wall Street has started to grapple with the unpleasant thoughts of a Democrat in the Oval Office and new tax policies.
President Trump steered the economy to record low unemployment and the stock market to all-time highs. However, the potential for major headwinds should Joe Biden decide to reverse many of the president’s policies has Wall Street fearing the worst.
What Would a “Blue Wave” Cause?
A “blue wave” with a Democratic president and both the House and Senate controlled by Democrats could mean tax hikes and other legislative actions that slow economic growth and drag on the stock market.
President Trump recently said that a Biden victory would “Crash the market. 401(k)s will be down the tubes, the wealth of the country will be down… They’re going to raise taxes, they’re going to raise regulations, and they’re going to put everyone out of business. It would be a disaster.”
David Rosenberg, chief economist and strategist at Rosenberg Research, agrees. He believes a Biden victory and ultimately higher taxes would harm the markets.
“The implications for the stock market from this shift to higher taxes are generally negative. A drop in the S&P 500 of 10.5% from where it is today is well within reason,” Rosenberg added.
Expectations are that Democrats would increase the capital gains tax for the highest earners. Also expected is a raise in the corporate tax rate. This raise aims to pay for some of the $6 trillion in proposed spending over the next 10 years.
According to the Congressional Budget Office, the country hasn’t even had a chance to experience the full benefits of the Tax Cuts and Jobs Act that Trump signed into law in 2017. Biden may live up to his promises of raising the corporate tax rate. If that happens, the Tax Foundation says the US GDP will be reduced by 1.5%.
Morgan Stanley and Goldman Sachs are among a handful of Wall Street banks warning that higher tax rates will drag down the stock market.
Michael Wilson, chief U.S. equity strategist at Morgan Stanley, told clients last month that raising the corporate income tax to 35 percent from 21 percent would make “100-150 points on the S&P 500 a baseline for the impact of a tax cut rollback, all else equal.”
David Kostin, chief U.S. equity strategist at Goldman Sachs, called Biden’s tax policy a “larger risk to earnings and consequently to equity prices” than the COVID-19 pandemic. The pandemic caused the stock market to plunge 34% before rebounding.
A Biden victory in November is seen as a “neutral to slight positive” by the equity strategy team at JPMorgan. The team explained that presidential challengers, like Biden, “typically campaign at an extreme,” but veer back toward the center following the election.
Let hope we never have to find out how detrimental Biden’s tax policies would be for our country and our economy.