Kingsmill’s Investment Miscellanea: Friday October 2, 2020

October 02, 2020 | Joshua Kingsmill


Key Takeaways

  • There are a lot of considerations for the markets with this election
  • A contested election has short term consequences
  • Expect volatility in the upcoming months

I’ve included an in-depth presentation about the U.S. election, for those who are interested, as it pertains to the markets and the economy.

Here are the primary considerations for the presidential election as I see them:

  • Balancing COVID-19 health concerns vs growing the economy
  • Tax Rates (Individual and Corporate)
  • Possible shifts in energy policies (green vs. more fracking, environmental considerations, etc.)
  • Health Care Reforms
  • Different Infrastructure Changes
  • China Policy (and other trading policies)

So there are lots in the piece, but let me highlight two main themes:

  1. Corporate Taxes:

Investors are, of course, concerned about corporate tax rates. Put: the more money companies earn after-tax, the more those companies are worth it. It is estimated that the corporate tax cuts that Trump implemented in 2018 were the largest contributor to earnings growth. This intuitively makes sense. Earnings grew by 22.5% in 2018, a very significant number. 12% of that came directly from the fact that companies did not have to pay as much taxes. Tax rates went from 28% to 19% for corporations.

We know that Biden seeks to roll back at least part of these corporate tax cuts. To the extent taxes are raised, it holds back earnings. But this tax increase is a much smaller aspect of the earnings in 2021, but it’s a much smaller aspect of earnings:

Chart 1

If there is one takeaway, it is that earnings would be reduced by about 5.5% to 9%. The flip side is that there is little room to decrease taxes much further. If there are higher taxes, of course, this doesn’t affect all sectors equally. Those that are growing and spending a lot of money on Research and Development are less effected than sectors that produce predictable cash flows (think Technology companies vs. REIT's or Utilities by way of example)

  1. Contested Election:

The past is certainly not a prediction of the future, but it’s probably safe to assume that barring a clear, unambiguous winner, we should expect litigation. In 2000, with those “hanging chads,” where the entire election hinged on an astonishing 537 votes, the election result wen to the U.S. supreme court before Gore conceded the election to Bush.

Chart 2

So it is reasonable to anticipate a lot of volatility in the upcoming results. Again, I am reaching out to each of my clients to go through these implications and ensure that your investment objectives remain aligned.

This week, I’m concluding with some timely advice. Many people say this article is useful. Smart people tell me it’s a good a read like nothing they have seen produced elsewhere. Many tell me it’s impressive. In the end, it is how to deal with people who continuously interrupt: Stay calm, use humour, and carry on.

RBC - Elections 2020: Key Issues for investors