President Donald Trump has refused to concede the presidential election, alleging fraud and raising legal challenges that could drag on for weeks. Final control of the U.S. Senate may not be determined until Jan. 5, when two run-off elections are completed in Georgia. New COVID-19 cases are surpassing levels seen this spring.
All that uncertainty should be bad for stock values. But times are changing. The Dow Jones Industrial Average is racing close to an all-time high, downtrodden stocks are soaring and investors appear to be looking elsewhere for their cues.
Pfizer’s claim on Monday that its novel coronavirus vaccine is 90% effective, beyond the 50% or 60% expected, probably mattered more than anything else that has happened in recent weeks, analysts at UMB Bank said on a call to clients Tuesday.
“The market is saying: Maybe a vaccine for COVID-19 is much more important than the election,” said Will Reese, director of equity research at UMB Bank, during a call with clients on Tuesday to discuss election impacts on U.S. stock markets.
The hope for a return to normal next year has single-handedly forced a rotation out of the big-growth tech names that benefitted from a lockdown and sent downtrodden value stocks like cruise lines and airlines soaring.
But the White House transition promises to be anything but smooth. The last time a presidential election was contested to this degree was in 2000 when the race between George W. Bush and Al Gore got hung up on a bunch of chads in Florida. The S&P 500 fell 3.4% the following week and ended down a daunting 21.1% over the following year.
“Of course, if 2020 has taught the world anything, it’s that literally, anything can happen. And frankly, it’s anyone’s
guess how markets might react to events like a hotly contested election in which the incumbent refuses to
accept the outcome, or an election hopelessly sullied by outside manipulation or widespread voter fraud,” said Thomas Nun, a portfolio strategist at Great-West Investments, in a prescient note he wrote before the election.
Historically speaking, markets tend not to like uncertain outcomes and the unseating of incumbents. But the momentum of the market also matters. In 2000, the excesses of the dot-com boom hung over stock valuations and provided a better explanation for what went wrong that year.
“Politics doesn’t matter that much to the economy and to financial markets,” said KC Mathews, chief investment officer at UMB Bank. “Markets go up when financial conditions are easing. Monetary and fiscal policy are what drive the market.”
A Joe Biden administration will likely seek higher taxes on corporations and high net-worth individuals. If the corporate tax rate is increased from 21% to 28%, it could cut corporate earnings per share by 4% to 13%, Reese said. But there are trade-offs. Tariffs are likely to fall under a Biden administration, which could boost earnings, and a stimulus package, if one can be hammered out, would likely be larger.
Biden has proposed raising the capital gains tax from 20% to 39.6% for those earning more than $1 million a year, which also could be a headwind to equities. Previous increases in the capital gains tax in 2013 and 1987, however, didn’t derail rising markets long-term, said Dan Trgovich, a senior securities analyst at UMB Bank.
What the fear of higher taxes might do is cause a spate of selling at the end of the year. Higher capital gain taxes would likely be made retroactive to the start of 2021. Investors at risk of falling under them may sell this year rather than take any chances, especially with the Senate still undecided.
“You may want to take action now,” advised Christine Graham, director of trust administration at UMB Bank.
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