Blue Wave Investing

Another factor that could determine the direction of the market in the second half of 2020 is the upcoming U.S. presidential election. Investors haven't paid much attention to the contest yet, but as November approaches, its potential implications will become more difficult to ignore.

Andrew Bary discussed the possibility of a "blue wave" in his Up & Down Wall Street column in the latest issue of Barron's. He noted that President Donald Trump has declined in the polls and that betting sites are giving him increasingly poor odds of winning reelection. But the market has largely ignored former vice president Joe Biden's rise in popularity. 

That could mean that the consensus is that the election will be close, and that Democrats won't win control of both houses of Congress even if Biden is elected president. Without the trifecta in today's hyper-divided partisan environment, a Biden administration might not produce much legislation perceived as unfriendly to investors. That could include a higher corporate tax rate or tougher regulation of banks.

Or, investors could be expecting that, if elected, Biden's top priority will be the economic recovery, and that focus would keep tax increases and heightened regulation at bay. J.P. Morgan equity strategist Dubravko Lakos-Bujas also expects relatively measured policy priorities from a potential Biden presidency.

Barron's Lisa Beilfuss reported on his thoughts today:

Given the current economic weakness, business recovery and job growth are likely to be prioritized over policies that could dampen economic growth, Lakos-Bujas says—meaning that the degree of a potential corporate tax reversal (Trump led a cut in corporate taxes to 21% from 35%) could ultimately be lower than the 28% Biden has floated.

While the second-order impact of a partial reversal would be significant—J.P. Morgan estimates reductions of about $50 billion and $100 billion, respectively, in capital expenditures and stock buybacks—the analysts say other policy proposals including infrastructure spending, softer tariff rhetoric, and higher wages should be net positive for S&P 500 earnings and largely offset any corporate tax headwind.

When including those policies, Lakos-Bujas sees the market impact of a potential blue wave as neutral to slightly positive.

Lisa goes on to highlight companies and sectors that could benefit from legislation that could come out of a Democratic-led Congress and White House. They include companies that would win business from greater infrastructure and green technology spending, and those exposed to China that might benefit from a de-escalation of  the U.S.-China trade war. There could also be implications for many health-care companies.

Find the rest of Lisa's report here. And read Andrew's column here.