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With US election only a few months away, one scenario that has been of growing interest among investors is a potential Democratic sweep setting the stage for a shift in the legislative agenda. The consensus view is that a Democrat victory in November will be a negative for equities. However, we see this outcome as neutral to slight positive. First, it remains to be seen how much of Biden’s campaign agenda is implemented if he is elected and what the make-up of his cabinet will look like. History suggests that challengers to an incumbent typically campaign at an extreme only to converge to the center post-election. Secondly, Biden’s proposed policy priorities were introduced in a healthy economy during the Primaries/pre-COVID-19. Given the current economic weakness, business recovery and job growth are likely to be prioritized over policies that could dampen economic growth and perhaps even jeopardize the desired 2022 midterm election outcome. As such, the degree of corporate tax reversal may ultimately be lower than currently discussed (i.e. <28%). Other policy proposals including infrastructure spending, softening tariff rhetoric and higher wages should be net positive for S&P 500 earnings and largely offset the corporate tax headwind. Further, a more diplomatic approach to domestic / foreign policy will likely result in lower equity volatility and risk premia (e.g. VIX in the year before the trade war averaged ~11, and after the trade war started averaged ~16



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