Why investors should be more terrified of a 'blue wave' of Democrats than Trump being re-elected
Another four years of President Trump may not excite everyone, but it could be much better than if a so-called "blue wave" of Democrats took control of the house and the Senate in November - at least from an investor's perspective.
"I think markets will be most concerned about what they call the blue wave, not just about the democratic executive, but certainly about the fluctuations in the Senate," said Darrell Cronk, chief investment officer for wealth and investment management Wells Fargo Investment Institute at Yahoo Finance is the first trade. "I think why they would worry about it is mainly because it would jeopardize the 2017 Tax Reform Act. There is debate that the Democrats are sure to lift this legislation and want to raise tax rates back to around 28% to 29%, which is the level before 2017. This would certainly challenge margins and earnings growth in an environment where it is already challenged. "
It is noteworthy that 35 seats are to be allocated in the Senate in November, according to the survey tracker 270toWin. The Senate currently has 53 Republicans and 47 Democrats. Ballotpedia estimates that 74 of the 435 house races are in play in house. The Democrats control the house, 233 to 197.
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However, a blue wave cannot be ruled out if voters are not satisfied with how Trump dealt with the twin crises of the COVID-19 pandemic and racial injustice.
Cronk joins a yawning list of Wall Street strategists who are concerned about Joe Biden's presidential win and are triggering this blue wave in the House and Senate.
In this June 11, 2020 photo, former Vice President Joe Biden, Democratic presidential nominee, speaks at a round table about the economic reopening with community members in Philadelphia. Biden's search for a running mate begins a second round of reviews for a dwindling list of potential vice presidential candidates, in which several black women are highly competitive. (AP Photo / Matt Slocum)
The former Vice President reversed half of the tax cuts signed by the President and raised the statutory tax rate to 28%. Credit Suisse estimates that this change in tax would increase the effective tax rate by 4% to 5% and lower S&P 500's estimated earnings per share by $ 9. Goldman Sachs was predicted that Biden's tax plan would result in a 2021 profit estimate cut by 12%.
Experts believe Trump will continue to extend his tax cuts in a second term, which could support corporate earnings and stocks.
"It could put pressure down and take a little swing [from the market]," said Cronk of a possible Biden victory.
It is currently worrying for investors that the market has not yet priced in a biden profit or a blue wave. If Biden continues to advance in the presidential election, market professionals expect stocks to react - perhaps harshly.
"The markets don't price a Trump election, but they don't price it either." At the moment, for whatever reason, when you speak to Irish punters, markets have not yet decided which direction the elections will take. If it becomes clear that the Biden Democratic tax environment is more progressive and higher, the market is currently not prepared for it. It won't be priced in or priced out, but it will, "warned George Ball, CEO of SMH Group, at The First Trade.
Brian Sozzi is the editor-in-chief and co-moderator of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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