Market Mayhem: Biden vs. Trump

By Saahil Menon, BSc Accounting and Finance Student at LSE | Founder of The Dividend Payout

Preparing our portfolios for this election might just be the most creative thing we ever do. The uncertainty hounding over the next 60 days prompts us to consider 3 things: what happens if Biden wins, what happens if Trump stays, and how can we prepare for either result? Elections are notorious for fuelling the volatility that could propel the market up or down. Thus, we need to shield ourselves against all outcomes and this is how beginner investors can do it.

A Biden Win Scenario

Biden’s policies regarding Wall Street tend to stem away from targeting the finance industry, with the only issue with potential to significantly impact markets being his corporate tax increase from 21% to 28%. Theoretically, this increase could be seen as bearish to the growth of stock prices as less profit for companies makes it difficult for their stock prices to increase. However, the real post-elections (scenario) would be different for two reasons: i) taxes are being increased in order to fuel fiscal spending and ii) the proposed tax increase would only cut company earnings by an average of 5%. Biden’s corporate tax strategy would result in economic improvements and job creations that would propel incomes across all classes, while costing firms a mere pinch of their corporate gains.

“We’re going to have people involved in the administration who make sure that we deliver an economic recovery that rebounds to the benefit of the middle class - not like the coronavirus stimulus and not like the Trump tax bill, where the majority of the benefits went to the top 1%.” – Ted Kaufman, Senior Advisor to Joe Biden

Despite the mostly positive nature of the Democrat’s tax plan, the way this translates onto markets is a small but short-lived sell-off after a Biden win: think of it almost as a check-mark visualised in Figure one.

Figure One: Short downturn followed by steady upturn (long term)

A democratic win would likely incur a minor sell-off post result day, because investors will take into account future reductions in profits (due to tax) and less lucrative market opportunities. The best investment to benefit in this interim would be the VIX index, an asset that profits when the market moves down. However, this downturn would only be short-lived as a stock market under Biden is still positive looking forward.

A win for Biden would also provide an element of certainty: with less geopolitical escalations and trade wars likely to materialise, investors can change their asset allocation to start adding more risk. In other words, market participants may deploy more cash into stocks and less into hedges (VIX, options, shorts): increasing demand for the former and therefore propping the market upwards in the medium-term. Hence, we see the smooth curve in Figure One as a viable outlook post-result, with some volatility in between that can be leveraged to our advantage.

However, this downturn would be short-lived as a democratic win provides elements of certainty such as geopolitical escalations and trade wars being less likely to materialise, allowing investors to change their asset allocation in favour of more risk. Thus, market participants may deploy more cash into stocks and less into hedges (VIX, options, shorts),

increasing demand for the former and propping the market upwards in the medium-term. Hence, we see the smooth curve in Figure One as a viable scenario post-result day, with some volatility in between that can be leveraged to our advantage.

A Trump Win Scenario

A successful re-election campaign for the current president would be positive for markets in the near-term however, the bigger picture is slightly marred by his controversial tendencies. In other words, think of a stock market under Trump’s second run as “more of the same” an upward curve made from a series of "w’s" as visualised in Figure Two.

Figure Two: Short-term positivity with longer-term volatility.

This suggests that investors should be bullish on markets, but simultaneously be ready to profit from geopolitical tensions and further trade wars, indicating a need for diversified asset allocation going forward. Preparing for Trump’s next 4 years could involve a trifecta of strategies:

i) Holding Gold: excessive money-printing and loose monetary policy will continue to devalue the US Dollar and therefore propel the value of gold upwards, as Dollar and Gold have an inverse relationship.

ii) Cash in hand: The series of "w’s" suggest small buying opportunities along the path forward: keeping cash aside will allow investors to “buy-the-dip” with each market meltdown.

iii) Focus on energy, defence and tech: Trump’s substantial support of energy companies and desire for a tech revolution without China is likely to support companies in these sectors such as ExxonMobil, Lockheed Martin, Amazon, and Microsoft, especially if subsidies/tax grants/loans are given to such firms.

Final Thoughts

In terms of markets, presidential elections have fared worse in the past. Both contenders this time have positive results for Wall Street: the caveat is solely about how positive. Biden’s narrative seems to support the economy more than markets, while his Republican counterpart helps the latter more than the former. Does this suggest a winner overall?

Figure Three: The Market’s Prediction

According to Figure Three, the party which results in most benefits for the market in the weeks before election day is usually yielded the winner.

Correlation or causation? We will leave that for you to decide, after you have prepared

your portfolio with the strategies above!

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