The final countdown: Investing themes for the November election

A perspective from E*TRADE Securities 08/20/20

There has been no shortage of polarizing events this year, including a global pandemic, unprecedented economic stimulus, and rising tensions between two world superpowers—all setting the stage for one of the most contentious presidential elections in recent memory.

Even without the heightened sensitivity surrounding the coronavirus, the general election tends to be a pervasive topic. For long-term investors, the reality is that the election may not have the impact on one’s portfolio that many may be expecting (more on that below). Yet as election season kicks into high gear, some investors may be eyeing potential new angles on hot-button issues. We’re breaking down a few themes and what a Trump vs. Biden win may mean for each.

An important caveat: While Democratic nominee and former VP Joe Biden is presently leading President Trump in nearly all national polls, the final outcome is far from certain. We may be less than 90 days out from the November 3 vote, but the road to the Oval Office is a long one. We’ll continue to keep investors abreast of the latest developments regarding the markets and presidential election.

Geopolitical tensions

Confrontations between the US and China have been almost a daily occurrence this year—from stunted trade negotiations, to blame over the handling of the coronavirus health crisis, to human rights concerns, to national security issues tied to Chinese social media apps. 

A second term for President Trump could reignite concerns about the possibility of a US-China trade war—a familiar source of market turmoil. Big tech and US retailers may be some of the most vulnerable areas of the market if the current administration’s relationship with China continues to deteriorate, potentially resulting in retaliatory measures such as higher tariffs and the de-listing of Chinese stocks from US exchanges.

Biden also has a “tough on China” stance, although his policies are generally viewed as less disruptive, and some analysts believe he would be more willing to return to the table to establish a mutually beneficial relationship. 

Corporate taxes and regulation

One of Wall Street’s perennial fears of a Democratic presidency is that it supposedly threatens market-friendly policies such as lower taxes and less regulation. Some analysts estimate Biden’s proposed tax reform, which includes increasing corporate, top tier, and payroll tax rates, could trim S&P 500® earnings by 5.5% in 2021 and cut capital spending by roughly $50 billion.1 But markets can often overestimate the likelihood—and magnitude—of campaign promises, and in the event Biden does become the next president, it’s possible his policies would be less onerous than the Street may fear. (It’s also worth noting that the stock market has, historically, fared better when a Democrat is in the White House.2)

On the other hand, four more years of President Trump’s “market-friendly” agenda may benefit financials and US energy companies through further deregulation. Smaller firms (think small-cap stocks) also tend to reap the benefits of a low-tax and deregulatory environment.

Economic policies

Finally, with the economy still stuck between a rock and a hard place, either candidate’s efforts to stimulate it through government spending will present risk as well as potential reward for certain areas of the market.

Biden has campaigned for an increase in infrastructure spending as well as a clean energy economy. His proposed $2 trillion plan to modernize American infrastructure while curbing climate change could create potential tailwinds for renewable energy and headwinds for the oil and gas industry.3 

President Trump’s fiscal policies, in contrast, have promoted spending in the areas of national defense and strengthening America’s borders over the last four years. The market has performed fantastically in Trump’s first term, and some investors may anticipate more of the same if he were to get re-elected.

Also, whichever candidate wins may be faced with the risks presented by a weakening dollar. While the unprecedented amount of monetary and fiscal stimulus has helped the economy—and markets—through a severe downturn, it comes with the cost of rising debts and deficits, which may continue to devalue the US dollar and, some analysts fear, trigger damaging inflation in the longer term. A weak dollar relative to other currencies, though, may benefit international stocks.

The bigger picture

As investors try to analyze the election, some may be tempted to align portfolios with forecasts—or pull out of the market altogether—but both approaches can be fools’ errands. While the candidates may have different approaches on some key issues, history suggests the stock market’s longer-term course is unlikely to be determined by the party affiliation of the sitting president. In fact, the market has generally followed an upward trajectory and delivered positive returns under both Democratic and Republican presidents.

Price data source: FactSet Research Systems. Index launch date is March 1957, according to S&P Dow Jones Indices.


The bottom line: Elections always create the perception of uncertainty in the markets, but the best approach is typically to ignore the noise. Myriad factors could ultimately influence market performance, and while either candidate’s presidency could present unique risks or rewards, the tried-and-true strategy for sound investing is to stick to personal timelines, long-term goals, and risk tolerance.

  1. Reuters, “Wall Street Week Ahead: Biden victory? Disputed election? Wall Street prices in November outcomes,” 8/14/20, https://www.reuters.com/article/us-usa-stocks-weekahead/wall-street-week-ahead-biden-victory-disputed-election-wall-street-prices-in-november-outcomes-idUSKCN25A2MM
  2. Kiplinger, “How Presidential Elections Affect the Stock Market,” 11/9/2016, https://www.kiplinger.com/article/investing/t043-c008-s003-how-presidential-elections-affect-the-stock-market.html
  3. CNBC, “Joe Biden unveils $2 trillion green infrastructure and jobs plan,” 7/14/20, https://www.cnbc.com/2020/07/14/joe-biden-unveils-green-jobs-and-infrastructure-plan-during-2020-election.html

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