end game (iii): if Biden wins…

As I mentioned earlier in the week, the investment implications of a Trump reelection are straightforward. As an American, I’d be deeply shocked and disappointed by the implied repudiation of traditional American values. As an investor, I’d expect a continuation of the “flight capital” market we have been in for some time, with a return of the domestic economy-centric Russell 2000 names to the bear market they had been in for most of Trump’s time in office, until late March of this year.

I find the stock market consequences of a Biden victory much harder to handicap. My thoughts so far:

–the transition of power might not be smooth. Trump has already declined to say he will accept the election result if he loses. He has begun to disrupt mail service on the, perhaps mistaken, idea that this will suppress more votes for Biden than for him. More “dirty tricks” may be in the offing. He may also end up testing the limits of the law by pardoning himself for any crimes he may have committed before or while in office.

Worries about abuse of power may have some negative effect on stocks around election time. It’s equally possible, though, that, sensing defeat, traditional Republicans will distance themselves from Trump in advance (as some seem to me to be already doing this), signalling that party loyalists should no longer follow Trump, thereby minimizing the damage he might otherwise do. It’s hard to know, but it says volumes about Trump that musing about what amounts to a post-election coup attempt doesn’t sound totally crazy. Can we be even remotely similar to Moscow 1991?

–interest rates will likely remain low for a long time. This is a distinct plus for stocks, for three reasons: they will remain attractive vs. the two other liquid asset classes, cash and bonds; bonds are unlikely to fall in price because of rising short-term interest rates, a development that would lead investors of all stripes to rebalance away from stocks; and the cost of carrying the mammoth amount of debt run up under Trump–with more possibly needed to repair damage he has done–will remain low. In fact, as I’m writing this, there are reports that the Fed will soon announce its intention to retain near-zero interest rates for the next half-decade

–income taxes will certainly go up, both for wealthy individuals (this doesn’t matter so much for the economy as a whole because the rich don’t tend to change their spending very much as income goes up and down) and for corporations. This latter means the 50% or so of S&P earnings that come from US operations will fall by, let’s say 8%. The resulting 4% drop in overall earnings is not good, but it comes closer to being a rounding error in analysts’ estimates than a serious shortfall. In today’s volatile stock trading, it amounts to maybe two or three down sessions in a row

–on the other hand, there’s lots of low-hanging economic fruit begging to be picked. The Trump economic program is a hodge-podge of wackiness, whose effect has been to please rich donors but to retard overall GDP growth, not foster it. Closing the borders to immigration, for example, shrinks GDP expansion by more than a third. Placing tariffs on imports has squeezed real incomes; retaliation has decimated the revenues of exporters, especially farmers. Trump’s central concept–restore low-wage manual labor jobs to the US while driving computer and engineering firms out of the country because they employ non-white foreigners–is about as loony as it gets. So too encouraging Detroit to keep on making gas-guzzlers while the rest of the world turns electric. Hard to quantify, but just ending insane programs has got to be good

–there are thornier issues to face, as well. Trump left actual tax reform both out of the name and the provisions of the Tax Cuts and Jobs Act of 2017, which did nothing to address sweetheart industry tax breaks that have long since passed their sell-by date. National infrastructure is four years older and creakier without having been touched …nor have Social Security or Medicare problems been addressed

–then there’s other senseless Trumpish stuff, like the ultra-strange attack on the viability of major domestic research universities, a national treasure, by denying deep-walleted foreigners access to them. The point is there are enough shoot-yourself-in-the-foot Trump things to just stop doing, for the resulting positives to dwarf the losses from a higher corporate tax rate and reversal of the tax giveaway to the rich.

my preliminary conclusion

Delegitimize white racists and let foreign workers back in and the country will be on the road to economic expansion again. No more crazy gains like in 2020 so far, but a shot at +10%. Maybe all the running next year will be in domestic consumer names.