Markets have been driven by record levels of stimulus, a historically accommodative Federal Reserve, and Covid-19 being less destructive for S&P 500 corporate performance than anticipated. 
As individuals used their stimulus checks and the enhanced unemployment benefits expired without a renewal, the fiscal environment deteriorated over August and September. The median unemployment recipient, as tracked by the JPMorgan Chase Institute, had spent two-thirds of the savings accumulated during the previous four months. Incomes in August fell 2.7%, and the savings rate declined to 14% – still very elevated historically, but substantially below the savings levels in the early stages of the pandemic.
Wall Street has also shifted in terms of their outlook of a Biden administration on corporate profitability and domestic growth. A Blue Wave is now widely considered a bull case for equities as the Democrats largely support a substantially larger stimulus bill than Republicans as a base case, with much broader and less targeted spending in addition to a full repeal of SALT tax limitations. With control over the House and Senate passing legislature becomes much more straight forward and markets have largely operated on the hopes of more stimulus since May.
While Vice President Biden has announced intentions to raise the corporate tax rate to 28%, up from 21% currently, he has not publicly clarified a position on the tariffs. However, considering the majority of Wall Street banks are expecting somewhere between a softening of the tariffs and a full repeal, we believe a change in policy is likely. Goldman Sachs, for instance, is modeling a 28% corporate tax rate – which would reduce 2021 profits by about 9% – but also expects a full repeal of the tariffs within the first year of a Biden Administration, resulting in a modestly positive effect on earnings. There are question marks around the popularity of such a move considering more than two-thirds of Americans have a negative view on China. A Trump win would likely result in a more hardline China stance which would be a negative to Wall Street.
Given the reliance that markets have had on existing stimulus and how correlated index performance has been on day to day progress for another round of fiscal measures, investors have increasingly focused on the likelihood of a Joe Biden victory. The way the map is currently structured, if Donald Trump wins all of the toss up states but Biden comes out on top in the states currently “Leaning Democratic” Biden would win the election. A Biden presidency, coupled with a blue Senate, likely means larger levels of stimulus and fewer roadblocks towards enactment in a period where time is really of the essence.
For this election, there are two issues: The Economy and Coronavirus. For individuals who have the virus as their top issue, Joe Biden is their overwhelming candidate. For others who view the economy as more important, Donald Trump is the favorite but by a smaller margin than Biden’s on Covid-19.
All in all, it’s not too difficult to envision a scenario where the election results in a net-pickup of 2-3 seats for the Democrats – getting them to a majority including the Vice President or just short of a majority. For the balance of markets that are increasingly focused on stimulus, the size of this majority is incredibly important as policy differences between Republicans and Democrats in the Senate are greater than the differences between the presidential candidates. A 3-4 seat majority for the Democrats likely means a stimulus bill somewhere between $2.5 – $3.0 trillion, while a smaller majority would likely lead to more targeted measures closer to the $500 billion – $1.0 trillion number signaled by Senate Republicans. Additionally, the smaller a potential majority, the more reliant a Biden administration becomes on more moderate Senators in the caucus like Joe Manchin (D., WV) and Kyrsten Sinema (D., AZ), which could alter policy from what was conveyed in the Democratic Platform as was seen in the attempted Affordable Care Act repeal in 2017.
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