Market Update - September 2020

Good afternoon,

After a sharp rise in August, the U.S. stock market showed increased volatility in September as the likelihood of a fiscal stimulus package announced before the presidential election decreased significantly. A deal in October is still possible, but without new stimulus, markets are likely to remain choppy between now and the U.S. election on November 3rd.


We’ve had a lot of question in the past few weeks with regards to our thoughts on the upcoming U.S. election – therefore I have chosen to focus much of this month’s letter on this topic.

According to surveys, at this stage the most probable scenario is a Democratic sweep (chart below). This outcome could cause some turbulence on Wall Street given the implications for tax policy (raising corporate taxes), but the focus of the Dems’ early days in office would most likely be on ensuring a strong economic recovery through an aggressive fiscal plan (more government spending and more direct stimulus). Therefore, a Democratic victory should not halt the upwards trend in the stock markets.



Biden’s tax plan

Biden supports raising corporate taxes from 21% to 28%. Before Trump’s tax cut in 2017, that rate was 35%. Regarding individual income tax, he supports restoring the top tax rate to 39.6%, up from its current 37%, for people making over $400,000. Those with income exceeding $1 million would have their capital gains and dividends taxed at the same rate as ordinary income. If elected, this proposal could push some investors to move up their plans to sell stocks in order to avoid being forced to sell under the higher tax rate. As the chart below illustrates, the most significant income tax hikes in the past were implemented in the wake of the Great Depression and both World Wars. In fact, the top marginal tax rate did not begin to decline significantly until the early 1960s, where it went from a high of 91% to a low of 28% in 1986.


Another Surprise Trump Victory?

In just under three months, U.S. President Donald Trump has gone from boasting about the best economy ever to heading into the fall election in the midst of a deep recession. While incumbent presidents are usually re-elected, a recession in the two years before the election significantly reduces their odds. Indeed, the last sitting president to win re-election in the wake of a recession was Calvin Coolidge in 1924! While multiple polls show that Biden holds a strong lead in the national polls, the numbers are tighter in the battleground states. Trump was also behind Clinton in most battleground states in 2016, but then went on to win the states listed below (with the exception of Nevada).


One lesson from the 2016 election however, is that anything can happen! This is especially true today, knowing that there is a non-negligible (5%) probability of an election so close that it could require a recount, in addition to the potential for delays caused by mail-in ballots. As the President himself said when questioned about his intention to ensure a peaceful transition: “Well, we’re going to have to see what happens.”

Another consideration - In the event of a Biden victory and a Republican-controlled Senate, it would be more difficult to get anything done. This ‘bad news’ with regards to no immediate stimulus would clash with the ‘good news’ of Trump’s tax cuts remaining in place, and the net effect is hard to quantify.

Nevertheless, we stand by out baseline view that the outcome of the presidential elections shouldn’t have an outsized impact on the direction of equity markets, as it should not put and end to the ongoing economic recovery. The same rationale holds for the persistence of COVID-19 cases, which have unsurprisingly started to rise again in several developed countries recently but without being accompanied by a proportional increase in mortality (chart below).

To be clear, although total lockdowns remain highly unlikely, the coronavirus will continue to weigh on the economic recovery until an effective vaccine becomes available. Fortunately, this seems increasingly plausible over the next 12 months (55% chance by March 2021 and 90% chance by September 2021, according to experts polled in chart below).


With the uncertainty of the election, it is difficult to make specific investment decisions based on a prediction of the outcome. However, by continuing to maintain a balanced and diversified mix of assets, we are in a great position to handle whatever the USA throws our way!

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