Potential Impact of the “Blue Wave”

Analysis: impact of the “blue wave” on key areas of the economy

Under the leadership of Joe Biden, a “blue wave” could be about to break upon the US economy in this election. The entire country is awaiting the outcome of the presidential election with bated breath, though polls are signaling a higher probability of the Democrats sweeping the board, winning the White House and both chambers of Congress. If these polls are correctly predicting the outcome of the election, markets should get ready for legislative changes that will impact global companies.

However, our main purpose here is not to discuss the outcome of the election but rather to examine the likely impact of this blue wave on domestic and international markets. We know very well that political events always result in ups and downs on the stock market. We will therefore try to analyze the effects of the election outcome on various companies and sectors and, ultimately, on investment portfolios.

A word of caution before we dive into our analysis: investors should always keep in mind that there is a big difference between a political campaign and the legislation that follows. Political candidates, once elected, do not always deliver on the promises they made on the campaign trail. Investors must therefore undertake their own analysis of each potential variable before making any changes to their portfolios.

In this article, we’re going to discuss potential changes and their impact on global companies in five key areas: the environment, taxes, labor, oil and trade.

Environment

If a Biden administration is elected, the proposed environmental priorities set out by the Democratic party are going to affect markets significantly. The Biden campaign has announced big changes concerning the environment that include climate-related taxes as well as tariffs on high carbon-emitting products. With Biden comfortably leading the polls after the presidential debate on September 29, the MSCI Global Alternative Energy Index is already substantially outperforming traditional energy stocks.

However, if the polling lead changes and control remains in the hands of the Republican Party, the proposed changes to climate legislation seem unlikely to materialize. As a result, global alternative energy stocks that have already surged may see sharp declines in earnings and, ultimately, investors may sustain significant losses in their portfolios.

Taxes

Stocks are more likely to suffer in the short term if the Democratic blue wave becomes a reality. Under Biden’s proposal, corporate taxes are likely to rise, with the tax rate for US-based multinationals set to increase from 21% to 28%. For affected companies, this 7% increase in corporate tax could depress after-tax profits by as much as 10%. Again, this pressure may cause stock prices to fall.

Labor

The cost of labor in an economy plays a vital role, since it is instrumental in determining company profit margins and is ultimately related to the national income.

One of Biden’s proposed aims is to prioritize a strong labor force above shareholders and to increase labor force participation in national income. Biden is proposing to strengthen the corporate workforce and boost workers’ bargaining power. If he succeeds, the US is likely to see a decade-long reversal in the economy, with the labor force’s share of national income pivot off its seventy-year low.

However, if this reversal materializes and US labor costs increase, this could drag down companies’ profits relative to those of their international peers.

Fossil fuels

Nor will the global oil market be unaffected by a change in the US presidency. A blue wave in the US will herald changes affecting domestic oil companies.

The US would rejoin the Iran nuclear deal (JCPOA) struck in 2015, together with follow-up negotiations. The Trump administration pulled out of the deal in 2018, leaving a big challenge for a potential Biden administration. The Iranian Ambassador has told the UK that Biden would have to regain Iran’s confidence by negotiating in a pragmatic manner.

Biden’s proposal to try to stop Iran from enriching uranium could bring a million barrels of Iranian oil per day back onto the market. This would put downward pressure on oil prices and could limit the market performance of oil companies.

Trade

The US has already renegotiated trade deals with four trading partners: China, Mexico, Japan and Canada. Two more trade deals, with the European Union and the United Kingdom, are due to be struck in 2021.

Although a Biden administration would probably be keen to finalize these deals as easily and quickly as possible, it might well take longer than a second Trump administration to strike a free trade agreement with the UK.

The trade war between the US and China has still not thawed, affecting some Chinese companies. A Biden administration would support a multilateral rather than a unilateral approach, leading to a slower and more transparent resolution process. There would also be a greater focus on the environment and labor than under a Trump administration. And we can be fairly sure a Biden administration would adopt a more cooperative tone when trying to influence China’s behavior.

COVID-19 has clearly been the main driver of stock market and economic performance this year. But a multilateral approach to trade underpinned by a less confrontational US stance could mean less market volatility, especially for companies dependent on both the US and China.

A change in government always has some impact on markets and the economy. This time around, a Biden administration would also potentially impact investors. Costly labor and higher taxes with lower tariff risks and more fiscal stimulus would usher in a tough and costly regulatory environment for US businesses.