What a Biden Win Means for Your Money

Most of us don’t understand the intricacies that make stock market work. You really don’t need to. What you do need to know is that stock market expectations differ over the long and short term. Over the long term, markets are based on these two fundamentals: generating consistent operating earnings and turning those earnings into cash flows. However, over the short term, fundamentals don’t mean as much. The main driver is emotion. There is no rhyme or reason, just a feeling. What is the biggest emotional trigger? Some main event like a presidential election or a major crisis, like Covid. This is the main topic of this post. I will have many others involving the stock market, so don’t worry.

The two candidates couldn’t be more different on economic policy. Trump will tout the performance of the economy and stock market before any of us ever hear the word Covid. He is going to tout how the markets have rebounded. They have. But it isn’t because of fundamentals. It’s because the Fed has pumped trillions of dollars into the economy (an issue for another day). How that affects the long term rebound remains to be seen. Of course, that question won’t be answered come Election Day. Voters will base their decisions on whether the President has defeated the virus, or if the virus defeated him. It’s really not about Biden at all. If there was no virus, Trump likely wins in a landslide.

But there is a virus. What if voters decide the virus has beaten Trump and want to go another direction with Biden? How would a Biden presidency look? The following is based on what he is on record as stating what his economic policy will look like.

When Trump took over in early 2017, The DOW was at approximately 17,000. It peaked in February at 29,000, then you-know-what happened, and it currently sits around 28,000. Could it dip back to 17,000? That would be a 35% drop. Let’s see what Biden has said about the two biggest impactors on jobs and the economy.

TAXES

Biden has stated he will raise taxes on the rich and cut them for the middle class (where have we heard that before?). Assuming the Senate goes along (Dems, will need to take control), he said he would repeal the Trump tax cuts. That will do the exact opposite of what he said: raise taxes on middle class and cut them for the rich. Just look at your own tax bill. Most of you interested in reading a post like this are probably in the middle class. You know if your taxes went down or up. I’m betting they went down. If Biden repeals the Trump tax cuts, rates go back to what they were when he was #2 in the White House.

Any tax increase is bad for the economy and consequently, bad for the market. The reason? There is less disposable income to be spent by consumers. Less spending means less revenue for businesses. Less revenue for businesses means less earnings. Less earnings means reduced cash flows. Incidentally, less earnings for businesses mean less tax revenue for the government. So Biden will have effectively cut his nose off to spite his face.

Here is something you won’t see in many finance blogs involving corporations. Raising taxes or a corporation will have little to no impact. In fact, you can say that the corporate tax rate should be zero. I will back this up in another post, but for now, what you need to know is that corporate executives, and the Wall Street analysts that follow them, have an earnings number in mind. CEO’s will do everything in their power to make sure that earnings number is met. If you increase an expense bucket like taxes, they will simply offset it in another bucket to get a zero net effect.

REGULATION

In addition to taxes, regulatory costs can hinder a company’s bottom line. Whether it’s some green regulation issued by the EPA, increased audits, or onerous accounting standards, the costs associated with these can add up to a significant amount. But like taxes, they will be pass on in some manner or form.

Biden has said he will reverse all of the Trump executive orders, thus increasing regulatory costs for all American businesses. They will have an even bigger impact on small to medium sized firms. A new regulation Biden is on record of supporting is the Green New Deal. Its intention is to eliminate all fossil fuels like oil and coal. However, it remains to be seen what will replace them. An interesting side-note is that the one industry that showed growth during Biden’s time in the White House was energy, led by fracking. He has vowed to ban it day one. I know, the irony. The cost to the American worker will be in the trillions and trillions of dollars, dollars that we don’t have as evidenced by our $27 trillion plus national debt.

LIKELY OUTCOME

What you have to understand about politics in this country is 1) practically every one of them, including the guy or gal you like, will say anything to anyone for their vote and 2) what they say may very well have the best intentions in mind, but the unintended consequences, or the feedback effect, have not been thought out in advance. Under the Biden plan, costs to consumers and businesses will go up with earnings going down. That is bad for you and me, the American worker and consumer. Biden can say all day that no, no, no, only the evil rich will pay. It won’t happen. It has never happened. It will never happen. Rich people, like every one of us, adjust their spending habits when someone slaps additional costs on them. In cases of those that own businesses, that cost will be passed on to you and me.

If you believe that you will get something for nothing, and some rich guy or gal is going to pay for it, do all of us a favor and stay away from the voting booth on Election Day. You are not qualified to cast a vote. I myself will move all of my equity holdings to cash around mid-October, because I do believe a Biden Presidency will significantly affect markets, particularly the S&P 500, negatively.

Do you see it the saw way as me?