It’s that time again — and I’m not talking about earnings season.
In a little over seven months, Americans across the country will head to the polls or mail in their ballots to determine who’ll lead the country over the coming four years. While many political aspects bear no influence on Wall Street, potential fiscal policy changes stemming from Washington, D.C., and ratified by the U.S. president can significantly impact corporate earnings and the nation’s economic well-being.
With the ongoing primaries totaling nearly 2,500 delegates, incumbent Joe Biden is gathering momentum as the presumptive Democratic nominee for a second presidential term. Since Biden assumed office on Jan. 20, 2021, as the 46th president, the evergreen Dow Jones Industrial Average, benchmark S&P 500, and growth-focused Nasdaq Composite have respectively surged by 28%, 36%, and 22%. Moreover, all three major stock indexes have reached new record highs since the year began.
But could a potential second term for Joe Biden trigger a stock market plunge? Let’s delve into some of the possible downside factors looming on the horizon and allow historical context to serve as the ultimate arbitrator.
President Biden delivering remarks. Image source: Official White House Photo by Adam Schultz.
Exploring the Possibility of a Stock Market Decline in a Biden Victory
Irrespective of the presidential incumbent, Wall Street perpetually faces challenges. Should voters favor Joe Biden in November, a concoction of potential policy transformations (if translated into law) and macroeconomic variables looms that could potentially knock the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite off their current highs.
Among the most worrisome proposals from an investment standpoint is Biden’s recent push to elevate the tax on stock buybacks from the existing 1% to 4%. While this percentage increase may appear modest, S&P 500 companies are estimated to have repurchased nearly $800 billion of their stock in 2023 alone.
For companies boasting consistent or expanding net income, share buyback programs that diminish their outstanding share count can positively influence earnings per share (EPS). In other words, firms engaging in buybacks may become more appealing to investors with a focus on fundamentals. Multiplying the buyback tax could dampen the allure of share repurchases, thus slowing down EPS growth.
Moreover, President Biden has advocated for an upsurge in the corporate alternative minimum tax rate from the prevailing 15% to 21% for companies with profits exceeding $1 billion, and an increase in the peak U.S. corporate income tax rate from 21% to 28%. In theory, taxing corporate profits at a higher rate could potentially lead to reduced spending on innovation, hiring, and acquisitions.
Insights from History: Stock Market Performance under Democratic Leadership
Over the years, the stock market has, on average, demonstrated positive annualized returns under both Democratic and Republican presidents. However, since 1945, Democratic presidents have outperformed their Republican counterparts while in office.
Based on a 2020 analysis by independent financial intelligence firm CFRA Research (pre-Biden presidency), Democrat presidents have overseen an 11.2% annualized return in the S&P 500, compared to 6.9% for Republicans. For instance, Bill Clinton and Barack Obama saw respective annualized gains of 15.2% and 13.8% during their terms in office.
While some Republican presidents have presided over challenging periods for Wall Street–such as the S&P 500 declining by 5.6% annually during George W. Bush’s tenure–Republican Calvin Coolidge secured the best stock market performance. In the approximately 5.5 years Coolidge served during the Roaring Twenties, the market delivered a staggering annualized return of 26.1%!
What these historical instances emphasize is that, over extended periods, the party in power at the White House is less critical. Although presidential candidates’ budget proposals can occasionally stir uncertainty on Wall Street, such occurrences are usually short-lived, indicating resilience in the market.
