Five months ago, people thought that Joe Biden would be bad for stocks, because, well, higher taxes.
That seemed reasonable—every other election in recent history had an effect on markets due to projected changes in tax policy.
Remember 2004? The stock market thought that John Kerry would raise taxes on dividends. When Bush won, dividend stocks were off to the races.
Today, people think that Biden will be good for stocks, because of stimulus and infrastructure spending. Everyone is talking about how a “blue wave” is good for stocks, having given up on the short thesis due to taxes.
Here’s an alternative take: maybe Trump or Biden winning is good for stocks. Maybe getting the election out of the way is good for stocks. Maybe stocks rally no matter what happens.
These things are always obvious in hindsight. The 2016 election was incredibly obvious in hindsight. But in the months leading up to it, we did the same game theory simulations. And, at the end of the day, nobody got it right.
Nobody is going to get this right, either. Anyone who says they know with certainty what is going to happen is suffering from overconfidence or is a charlatan. Or both.
Maybe nothing happens! Maybe the stock market is unch after the election.
Ultimately, this comes down to an exercise in risk management. There are stocks that will clearly do well if Biden wins, and there are stocks that will clearly do well if Trump wins. Own a little bit of both. Own some bonds, some gold, and some real estate.
This may seem like a nihilistic approach, but my experience is that the more people are looking at an opportunity, the less of an opportunity it is.
The trend in tax policy is toward increasing progressivity, the idea that rich people pay more than poor people.
The tax code has become increasingly progressive since 1988, when there were only two tax brackets:
- One bracket at 15%, for incomes up to $29,750, and
- Another bracket at 28%, for incomes over $29,750.
In today’s dollars, $29,750 is about $62,000. I would like to go back to those days.
My quibble with our current system of taxation is not the absolute level of rates; it’s the progressivity. It’s not so much that people are paying a lot on the high end—it’s also that people aren’t paying very much on the low end.
As you travel around Europe, taxes are high, for sure. But on the low end, they are not especially low. Everyone pays. Everyone has skin in the game.
Here, people with lower incomes do not have much of a financial stake in what goes on in the country.
The problem is that, regardless of whether Biden or Trump wins, you can bet the tax code will become even more progressive. This is bad for democracy.
Many years ago, Dennis Gartman observed that fewer and fewer people had any tax liability at all—a number approaching 50%. What would happen, he asked, if the people in the bottom 50% could vote higher taxes on the top 50%?
We are there.
Although that’s not what’s happening—this election is split on income and education, but in reverse. Counterintuitively, people with lower incomes are not voting for higher taxes—it’s the people with higher incomes.
It’s an urban legend that rich people tend to vote Republican—they really don’t, especially not now.
Biden Is Priced In
Whatever you believe about the accuracy of the polls, I firmly believe that stocks are pricing in a Biden victory.
Just look at the Invesco Solar ETF (TAN). It would not be shooting up if Trump were priced in. The fund is frontrunning a lot of spending on climate change initiatives, which Biden has pledged $2 trillion toward.
If Biden is priced in, and Biden wins, the stock market is unlikely to do much. In fact, there may be a “sell the news” event, which is usually what happens after everyone piles into a trade.
If Trump wins, it will take the market by surprise, much like what happened in 2016. And if the election is contested in any way, I doubt it will create much market turmoil, as everyone seems to be hedged for that possibility.
I’ve traded through five elections, and you cannot draw any generalizations from any of them. All you can do is plan for asymmetry in positioning.
It’s like betting on horses—you can bet on the long shot, and it’s fun, but you won’t win very often. Or you can bet on the favorite, which is boring, and you won’t win very much, but you’ll win more often.
Jared Dillian is an investment strategist at Mauldin Economics, a former head of ETF trading at Lehman Brothers, and the author of The Awesome Portfolio. Subscribe to his weekly investment newsletter, The 10th Man, and listen to his daily radio program, “The Jared Dillian Show.” You can follow Jared on Twitter @dailydirtnap.