Biden blue wave sends bearish signal to stocks

Fears of a higher capital gains tax would cause 'serious selling'

A Democratic sweep in the upcoming election may not be the bullish event for the stock market that some investors are betting on, according to one Wall Street strategist.

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While no sure thing, traders on the prediction market website Predictit are pricing in a 56% chance that Democrats take both houses of Congress as well as the presidency, allowing them to ram through bills including tax increases they say will fund their ambitious legislative agenda.

Former Vice President Joe Biden has promised to reverse at least some of President Trump’s corporate tax cuts on day one of his presidency. He has also promised to raise taxes on the highest earners and raise the capital gains levy to as high as 40%, up from 15%, for the wealthiest Americans.

Fears of a higher capital gains tax would cause “serious selling to take place in November and December,” Matt Maley, a Boston-based chief market strategist at Miller Tabak & Co., told FOX Business, noting the huge gains that have occurred in mega-cap tech stocks.

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High-fliers like Apple Inc., Amazon Inc. and Microsoft Corp. have all climbed at least 250% since President Trump’s inauguration on Jan. 20, 2017. Those gains have been fueled by earnings generated under the president’s Tax Cuts and Jobs Act, which dropped the top U.S. corporate rate from 35% to 21%, among the lowest in the world.

Taking away those tax cuts is “going to hurt earnings,” Maley said.

TickerSecurityLastChangeChange %
AAPLAPPLE INC.116.20+1.15+1.00%
AMZNAMAZON.COM INC.3,259.99+50.76+1.58%
MSFTMICROSOFT CORP.213.84+3.76+1.79%

His belief a blue wave will be detrimental to the stock market cuts against the grain of a recent Wall Street narrative that says any tax increases would be more than offset by a large increase in fiscal spending.

Democrat Joe Biden, left, has promised to undo at least some of President Trump's tax cuts if he captures the White House. (Getty / AP)

Goldman Sachs strategists last month said a big stimulus package funded in part by tax increases would “boost economic growth and help offset the earnings headwind from higher taxes.”

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House Speaker Nancy Pelosi initially wanted a $3 trillion stimulus plan, but that was trimmed to $2.2 trillion amid negotiations with Republicans. With a deal now looking less likely until after the election, Pelosi might ask for more under a unified Democratic governiment.

“Markets are convinced there will be a big stimulus bill one way or another,” said Greg Valliere, chief U.S. policy strategist at Ontario, Canada-based AGF Investments. Extraordinary stimulus from the Federal Reserve will also provide support, he said.

Democrats are confident in their chances, and believe they can get a better deal by waiting until next year, Valliere noted.

Maley, however, thinks another COVID-19 stimulus package is already priced into the markets and isn’t so sure that additional stimulus is coming down the pike in 2021.

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He said new presidents typically “don’t care” about the economy during their first year in office because voters pay more attention to years three and four. He pointed to the economy during former President Ronald Reagan’s first term as evidence.

“There was kind of a double-dip in 1982. Why? Because he backend-loaded most of his fiscal plan,” Maley said. “And sure enough, the economy was doing really well in 1983 and 1984," when Reagan won in an electoral-college landslide.