With the market edging higher and the prospect of combative presidential debates to start soon, speculation is running rampant on how a Biden victory could impact the stock market. On the one hand, there are those who believe that the prospect of raising taxes and increased regulation from a Biden presidency could easily take the markets down 10%. Biden has called for corporate profits to be raised to 28% from 21% and capital gains tax to be raised to 39.6% from 20% on income of more than $1 million. Just these two proposals alone could begin a wave of selling if Biden gets elected.
On the other hand, if Biden can control the federal deficit that has spiraled out of control this year and forge better relationships with America’s trading partners and most importantly, reverse some of Trump’s anti-immigration policies, stock market may take kindly to his appointment and get back on the path of the average stock returns of the past century of 10%. As a reference, returns during the Clinton and Obama years was 17.5% and 16.3% annually, respectively. Return through last week under Trump has been 13.7% annually.
Future Wealth’s View
If the last election was any indication, no one will know who has won until the results are announced the day after the election. And, no one had a clue if Trump’s victory would take the market higher – which it did. In essence, betting on the next Presidential election and making bets on investments to hold or sell, is the wrong way to think about one’s portfolio.
Presidents come and go, but our future depends on intelligence and diligence. For that, we, at Future Wealth, would prefer to look at time tested indicators. Warren Buffett once wrote that investors would have seen the dot-com crash coming from a mile away had they paid attention to what he described in a Fortune article in 2001 as “probably the best single measure of where valuations stand at any given moment.” Known more popularly as the Buffet Indicator – the measure is simply the total market cap of all U.S. stocks relative to the country’s GDP. When it’s in the 70% to 80% range, it’s time to throw cash at the market. When it moves above 100%, it’s time to lean toward risk-off. With recent run-up, the Buffet indicator now stands at 100.066%. Of course, the denominator – GDP has dropped significantly due to Covid in the past two quarters but the rationale of this indicator is that markets should have also taken a similar correction.
Whether we get another four years of Trump or not, it is best to look at fundamentals at all times. Running a portfolio based on polls or politics will end badly. That is a well known indicator.