Wall Street

Business world braces for blue sweep

“The market doesn’t really care if you’re red or if you’re blue, the market just doesn’t like uncertainty“


Wall Street and business groups are bracing for the possibility of a blue sweep in Washington that would leave Democrats in charge of the White House and both chambers of Congress. Such a scenario could lead to sweeping policy changes affecting taxes, regulations, coronavirus relief and other economic policies.

“I would say that’s definitely a concern on a lot of investors’ minds,” said Judy Lu, CEO and founder of Blue Zone Wealth Advisors.

Democratic presidential nominee Joe Biden holds a lead in national polls and in key swing states over President Trump. Democrats are in control of the House and, if Biden wins the White House, would need to have a net pick-up of three Senate seats to gain control of that chamber.

With one party controlling Washington, Lu says, businesses anticipate more sweeping policy changes, which makes it harder to plan.

“The market doesn’t really care if you’re red or if you’re blue, the market just doesn’t like uncertainty,“ she said.

If Biden were to win but the Senate were to remain in GOP control, on the other hand, the expectation from businesses would be that little would get done.

“Markets have historically performed well in times of political gridlock,” Lu said. “If Biden were to win but without a full blue sweep, it would probably be favorable for the market.”

Even without a sweep, a new Biden administration could heavily influence policy at the Treasury Department. Speculation has swirled that Sen. Elizabeth Warren (D-Mass.), a Wall Street boogeyman who has advised Biden on economic policy and was a front-runner to be his running mate, may be offered the job.

But changes could be more far-reaching with legislative backing.
Jeffrey Corliss, a managing director and partner of RDM Financial Group at Hightower, says one of the main concerns businesses have over Democratic control of Washington comes down to one word: taxes.

“If they’re able to reverse or partially reverse the Tax Cuts and Jobs Act, that will get some companies to rethink their strategies going forward,” he said, referring to Trump’s 2017 signature tax cut, which lowered the corporate tax rate from 35 percent to 21 percent.

Biden has proposed raising the rate back to 28 percent. His proposal would also install a new minimum corporate tax of 15 percent to ensure that no corporation paid zero in taxes.

On the individual side, one of Biden's plans would increase taxes on high income earners' investments, a policy some worry will make it harder for companies to raise money.

Some observers believe that could represent just the beginning.

“A rate of 28 percent is the likely target, however that may change depending on a number of factors, including the amount of revenue needed to fund Democratic spending priorities and the makeup of the House and Senate,” a UBS analysis of Biden’s tax plan noted.

Democrats could use the budget reconciliation process to gut the Trump tax bill with a simple majority, averting the legislative filibuster that requires a 60-vote hurdle for legislation to advance. Republicans used the same tactic to pass the tax law in the first place.

Heavyweights in the Democratic Party, including former President Obama, have pushed to scrap the procedural hurdle, and Senate Minority Leader Charles Schumer (D-N.Y.) has kept the possibility open.

Ryan Detrick, chief market strategist for LPL Financial, says a decision to eliminate the filibuster could create exactly the kind of policy uncertainty markets hate, especially in the short run.

“Should that come up there it could take the pendulum of power even further to the left,” he said.

“That could be a worrisome sign from a market point of view,” he added, though he noted that both markets and the economy writ large have a historical record of performing well when Democrats are in charge.

Indeed, a Democratic Washington would be a boon to some business sectors.

Big corporations could face larger tax bills, giving smaller competitors a leg up. Renewable energy companies and the nascent cannabis industry could boom.

The unique circumstances in play in 2020 could also profoundly change how businesses think about who controls Washington.

Some say businesses would actually benefit with Democratic control of government given Trump’s response to the coronavirus, which has shuttered bars and restaurants, devastated the travel and hospitality industries and left nearly 180,000 dead.

“The business community will do way better if there’s a blue sweep just because of the actions a Biden administration could take to clean up the mess of this administration,” said Heidi Shierholz, a former Labor Department chief economist in the Obama administration.

Biden said he would enforce a national mask mandate, a policy Trump has refused but that Goldman Sachs projected would increase output by 5 percentage points.

Another potential upside for businesses is the Democratic willingness to spend big on fiscal stimulus.

“The most pressing economic problem facing businesses right now and in the aftermath of all this is the lack of demand for goods and services,” Shierholz said.

The pandemic has left millions of people unemployed, meaning people don’t have money to spend at those businesses that remain open, which in turn buy less from their suppliers.

Stimulus policies such as the Paycheck Protection Program for small businesses and $600 in additional weekly unemployment benefits have helped keep the economy afloat by putting cash into people’s pockets and keeping it circulating through the economy.

But clashes between Democrats and Republicans have allowed those key programs to lapse, despite calls from the Federal Reserve to go big on stimulus spending.

Republicans, in particular, have shown an increased concern about the ballooning debt, putting the size of the next stimulus package — and its ability to pass at all — into question.

“A blue wave would mean that fiscal relief would be forthcoming,” said Shierholz.

If Biden wins the White House and Democrats rule both chambers of Congress, there are also likely to be battles within the Democratic Party between centrists and progressives.

Biden is seen as a centrist, though Sen. Bernie Sanders (I-Vt.), whom Biden defeated in the primary, has said his administration would be the most progressive in history.

Progressives say that their policies can help build a stronger economy over time.

They point to studies showing that increased inequality can reduce economic growth. Better access to health care can help would-be entrepreneurs start businesses without fear of losing a key benefit. A stronger social safety net can help unemployed people find better jobs that are better suited to their skills.

“If you raise taxes you can pay for good infrastructure, good roads, good transportation, good digital infrastructure, a well-educated workforce. All that makes businesses better off,” Shierholz argued.

Nigel Green, CEO of the deVere Group, says that even if Biden loses, businesses can expect significant changes in the policy landscape.

“Whoever wins the keys to the White House — Trump or Biden — we can expect some major policy shifts which could affect investments, taxation, regulatory landscapes and corporate earnings, amongst other issues, for the next four years,” he said.

If he wins reelection, an emboldened Trump could ramp up trade wars or pursue an aggressive decoupling from China that could upend supply chains.

“I would suggest that investors review their portfolios to ensure that they are as ‘president-proof’ as possible,” he said.

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