with Brent D. Griffiths

There are enough market-rattling crises unfolding at once now to keep investors from worrying about the fallout from an election that remains 132 days away. 

But as former vice president Joe Biden, the Democratic presidential nominee, pads his polling lead over President Trump, and Democrats see slightly sunnier prospects for taking the Senate and expanding their House majority, market players are increasingly focused on the implications of a wholesale power shift in Washington for their portfolios.

Investors are growing more certain a blue wave is building. But Wall Street is less clear on its impact.  

The initial thinking from market strategists is that a Democratic takeover would weigh on share prices, as a Biden administration worked with newly empowered congressional Democrats to roll back Trump’s tax cuts and apply new regulatory scrutiny to big business, especially the tech industry. 

“It's a question of what you know versus what you don’t know,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. “The uncertainty over what could happen if there’s Democratic control isn’t something that market has had to price in to this point.” 

Biden now claims a commanding lead over Trump in the online betting market PredictIt:

And just this month, Senate Democrats have jumped out to an even wider advantage over Republicans on the same platform:

Since March, however, the typical inverse correlation between stocks and the prospects of a Democratic presidential victory have diverged:

Via Variant Perception Research: 

Columbia University economist Adam Tooze offers three theories for the phenomenon:

There's a disconnect between the stock market rally and the effect investors expect Biden's tax plan might have on its performance. 

But some analysts don't expect it to last. The team at Goldman Sachs, for example, sees a reckoning coming as investors weigh the risks of a second surge in coronavirus infections and start to key in on the presidential election.

“Periods of elevated policy uncertainty have generally coincided with lower-than-average equity allocations during the past 30 years,” they wrote in a Sunday note. The S&P 500 closed at 3,117.86 on Monday, toward the upper range of where the firm’s analysts expect it to trade for the rest of the year. “Our year-end target remains 3000,” they wrote.

That research built on work the team produced earlier this month arguing that Biden’s tax agenda, if enacted, would cut S&P 500 earnings by $20, to $150 per share. The biggest change Biden proposes is hiking the corporate tax rate from 21 percent to 28 percent; it stood at 35 percent before Trump signed sweeping tax cuts into law in 2017. The Goldman team assessed what that change would mean when added to other corporate tax increases Biden is pitching, along with their overall impact on economic growth:

“Although the coronavirus has caused the sharpest decline in economic activity on record, in some ways tax policy represents a larger risk to earnings and consequently to equity prices,” they wrote. That’s in part, they said, because while investors have decided to look past the ongoing economic crisis as a one-time shock, “a shift in government policy toward higher corporate taxes would reduce expectations for the entire long-term stream of profits.” 

Investors have been asking more questions about Biden's tax plan since he began securing his lead over Trump around Memorial Day, says James Lucier, managing director at Capital Alpha Partners. The Tax Policy Center estimates Biden's proposals would need to raise roughly $4 trillion total, with roughly half coming from corporations. 

Even a Democratic sweep wouldn't guarantee Biden's tax plan becomes law. But Lucier says it remains a possibility for investors to assess. “I was initially skeptical you would raise taxes at a time of high unemployment and economic recession, but if economy is recovering, that may not be the case,” he tells me. 

Others are more bullish on the market impact of a Democratic romp.

Morgan Stanley analysts argue the likeliest election outcomes — from a complete Democratic takeover to Republicans continuing to control some levers of power — would yield the same policy results, as far as investors are concerned. That is, Washington would keep the spending spigots open, providing key support to economic growth, at least in the immediate term. Republicans hanging on to power would push through deficit-financed tax cuts, the bank’s team posits; and empowered Democrats would spend more than they raised with tax hikes.

The analysts, in a report earlier this month, don’t discount that Democrats would redistribute money from corporations and the wealthy. But, they add, the likelihood of those tax changes needs to be considered in context “of the broader economic picture… The economic situation is too fluid today to make a call on what the interplay of economic policy, fiscal spending and corporate taxes will look like in a Democratic controlled government.”

If teasing out the election’s market repercussions broadly is too tough, specific sectors could offer cues.

Tech stocks in particular helped power the market out of late March gulch it landed in as investors first panicked over economic fallout from the pandemic. Just six of them — Facebook, Amazon, Apple, Netflix, Google and Microsoft — now make up nearly a quarter of the S&P 500’s value:

A Democratic push to apply new antitrust scrutiny to those names could weigh on the market as a whole.

That's according to Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management. “The tech sector has more than doubled the return on the rest of the stock market since 2010,” he pointed out in a recent note.

Here is a look, via Cembalest, at the number of antitrust cases the Justice Department has kicked off over the last four decades:

A Democratic sweep presents a “potentially scary proposition for big tech companies,” Wedbush Securities analyst Dan Ives tells me. For now, he says, the regulatory threat against the industry is “viewed as a contained risk. But we’re starting to edge closer to business model changes if you had a Biden White House and a Democratic controlled Senate.”

And the success that the handful of tech giants have enjoyed in the pandemic has only raised their profile in Washington. “They’ll have a clear target on their back as we go into the fall and 2021, depending on which way the election goes,” Ives says.

History suggests of all power combinations, investors prefer a Democratic president and a split Congress.

That’s according to an analysis Ned Davis Research conducted of the Dow Jones industrial average’s performance dating back to the beginning of the last century. But it is hardly conclusive. That arrangement has been rare — and all-GOP control of the executive and legislative branches ranks just behind it. Here’s how it looks, in somewhat psychedelic chart form:

In general, says Clissold, “the market does better when the incumbent party wins.” But there may be a chicken-and-egg dynamic at play there, “where both the market and the election are reflecting the economy’s performance.”

While the election is attracting more of his clients' attention now, Clissold says investors are still trying to assess how Biden, a onetime moderate now leading an increasingly progressive party, would govern. “His vice presidential pick is getting a lot of interest,” he says.

But November is not yet top of mind. “Financial markets are very guilty of that: Ignoring something, then thinking it’s the only thing that matters.”

Market movers

Stocks rose on tech strength.

The Nasdaq closed at a record high. CNBC's Fred Imbert: “The Dow Jones Industrial Average gained 153.50 points, or 0.6%, to close at 26,024.96. The Nasdaq Composite posted a record closing high, advancing 1.1% to 10,056.47. The S&P 500 ended the session up 0.7% at 3,117.86. The major averages briefly pared some of their gains towards the end of the session, after Texas Gov. Greg Abbott told reporters the coronavirus is spreading at an unacceptable rate. Apple shares jumped more than 2% and hit a record high after the company made a slew of announcement at its annual WorldWide Developers Conference.”

  • The Nasdaq's advantage over the Dow and S&P 500 is now the biggest since 1983, the Wall Street Journal's Karen Langley notes: “A surge in big technology stocks has helped the Nasdaq Composite rally 12% in 2020, while the Dow Jones Industrial Average of blue-chip stocks is down 8.8%. The benchmark S&P 500 is hovering in between them, off 3.5%.”

Futures point to more gains, after diving on Peter Navarro's claim the U.S.-China deal is “over.” More from CNBC: “The Dow Jones Industrial Average futures implied an opening gain of nearly 300 points. S&P 500 and Nasdaq futures also pointed to a positive open.” 

They tanked about 400 points after Navarro, the White House trade adviser, told Fox News in an interview that the trade agreement between the world's two largest economies had fallen apart. He subsequently put out a statement walking back the claim. And Trump tweeted an assurance the deal remains “fully intact.”

Many investors are still afraid of stocks.

Nearly $5 trillion is parked in money markets: “The coronavirus sell-off sent investors fleeing into money market funds, which ballooned well above $4 trillion, surpassing the peak of the financial crisis, according to research by LPL Financial,” CNBC's Jesse Pound reports.

“The flood into money markets pushed the sector’s assets to the highest on record, peaking at $4.672 trillion during the week of May 13, according to Refinitiv Lipper, and even recent net outflows have left more than 90% of that increase intact. Money markets aren’t the only sign that investors are holding cash outside of stocks and bonds. Deposits at banks have spiked as well, according to data from the Federal Reserve Bank of St. Louis.”

  • Robinhood traders step into the void of buybacks: “While net corporate demand is likely to plunge 80 percent to $100 billion this year as repurchases slow and share offerings increase, the decline is being partly offset by a roughly $270 billion increase in demand from households, according to Goldman Sachs Group Inc. Foreign investors are also a much bigger force in 2020, the bank says,” Bloomberg News's Lu Wang reports.

Blackstone CEO Steve Schwarzman sees a “V” recovery in the next few months: “While markets are benefiting from both liquidity and optimism that the coronavirus crisis can eventually be contained, Schwarzman said the economy will ‘take quite a while before we sync up and get back to 2019 levels,’” Bloomberg's Heather Perlberg and Hema Parmar report.

“Also at the [ Bloomberg Invest Global virtual event], hedge fund manager Bill Ackman said he believes the recovery will begin by year-end and a normalization of the economy in the second half of 2021. Ackman said he sees gradual improvement on all fronts with so many resources poured into the health-care crisis.” 

Coronavirus fallout

From the U.S.:
  • Cases are rising in most states but reopening continues. “Amid surging coronavirus infections in most states, some state and local officials are pushing to lift restrictions and return to some degree of normalcy. Twenty-nine states and U.S. territories posted an increase Monday in their rolling average of new reported cases, with nine states reporting record average highs,” The Post reports.
  • Gottlieb says this a “pivotal week” for states with spikes in cases: “I think this week’s going to really be a pivotal week for us to get a picture of where things are heading in states like Florida and Arizona and Texas, whether or not they’re tipping over into exponential growth or not,” former FDA Commissioner Scott Gottlieb said on CNBC’s “Squawk Box.” “The problem is with exponential growth everything looks sort of OK until all of a sudden it doesn’t.”
  • Contact tracing apps still aren't ready: “What is emerging across the country so far, however, is a patchwork of buggy or little-used apps, made by partners ranging from startups on shoestring budgets to academics to consulting firms. Some are working with location-tracking firms that have been under fire from privacy advocates. None appears ready for a major rollout, even as more local governments ease restrictions,” the WSJ's Rolfe Winkler and Patience Haggin report.
  • Larry Kudlow says there will be no second wave. “There is no second wave coming. It’s just hot spots,” the White House economic adviser said in an interview on CNBC. “I really think it’s a pretty good situation.”
  • Amid threats and pushback, public health officials are leaving their posts: “Public health workers, already underfunded and understaffed, are confronting waves of protest at their homes and offices in addition to pressure from politicians who favor a faster reopening. Lori Tremmel Freeman, chief executive of the National Association of County and City Health Officials, said more than 20 health officials have resigned, retired or been fired in recent weeks ‘due to conditions related to having to enforce and stand up for strong public health tactics during this pandemic,’” Rachel Weiner and Ariana Eunjung Cha report.
  • Kinks linger in the food system: “There are millions of pigs that need to get processed fast, before their weights become too burdensome, or farmers will be forced to euthanize the animals. Meanwhile, food sellers like pizza maker Papa John’s International Inc. and Campbell Soup Co. had to bulk up on extra ingredients to avoid further disruption,” Bloomberg News's Isis Almeida reports.
The corporate front: 
  • Google's U.S. ad revenue is expected to decline: This is the first time it will decline “since eMarketer began modeling it in 2008, the research firm said, largely because Google’s core search product is so reliant on the pandemic-battered travel industry,” the WSJ's Keach Hagey reports. “As the world’s largest digital-advertising company, the Alphabet Inc. unit has heretofore been a money-printing machine, expanding its overall advertising revenue at double-digit rates in nearly every year of its two-decade existence, save for the 2008-09 financial crisis, when it only grew 8 percent.”
  • Carnival extends operations pause: “Carnival Cruise Line said it has extended its pause in operations for North American voyages until Sept. 30,” Reuters's Helen Coster reports. “Industry trade group Cruise Lines International Association said on Friday its ocean-going cruise line members, which include Carnival, Royal Caribbean Cruises Ltd and Norwegian Cruise Line Holdings Ltd would voluntarily extend their pause in operations from U.S. ports until Sept. 15.”
  • T.J. Maxx refuses to change its strategy: “Parent TJX Cos., which also owns Marshalls, HomeGoods and other discount chains, is as focused as ever on drawing shoppers to its more than 4,500 stores world-wide, betting consumers are desperate to roam the aisles after months of being stuck at home … Off-price retailers such as T.J. Maxx have found the economics of e-commerce unattractive, but they risk losing more sales should another lockdown occur,” the WSJ's Suzanne Kapner and Sarah Nassauer report. 
Around the world:
  • Sanofi eyes faster vaccine approval. The French drugmakerexpects to win approval for a Covid-19 vaccine in the first half of next year as it strengthens a pact with Translate Bio Inc. to develop other shots in a deal that could be valued at as much as $2.3 billion,” Bloomberg's Thomas Muller and James Patton report. “The experimental coronavirus vaccine that Sanofi is developing with GlaxoSmithKline Plc was previously targeting approval in the second half of 2021.”

Trump tracker

Trump limits foreign workers and extends immigration restrictions through December. 

He argued the moves will protect workers displaced the pandemic. “The ban expands earlier restrictions, adding work visas that many companies use, especially in the technology sector, landscaping services and the forestry industry,” Nick Miroff and Tony Romm report. “It excludes agricultural laborers, health-care professionals supporting the pandemic response and food-service employees, along with some other temporary workers.

“The restrictions will prevent foreign workers from filling 525,000 jobs, according to the administration’s estimates. The measures will apply only to applicants seeking to come to the United States, not workers who already are on U.S. soil.”

The U.S. Chamber, for one, objected. From John Murphy, the business lobby's senior vice president for international policy: 

Trade fly-around

The E.U. is increasing ready to play hardball with Beijing.

At issue is China's closed-off economy despite pledges to be open to international companies: Top European Union officials warned China’s leaders … that ties between the two trade partners would be damaged if they failed to further open their economy to European companies and treat foreign firms fairly, a clear sign of hardening attitudes toward Beijing,” the WSJ's Laurence Norman reports.

“Following videoconferences with Chinese Premier Li Keqiang and President Xi Jinping, European Commission President Ursula von der Leyen and European Council President Charles Michel urged Beijing to swiftly deliver on promises already made and conclude years of talks on an investment deal that Europe hopes will rebalance trading ties. EU officials have repeatedly said in recent months that they don’t want to be drawn into what they see as a growing global confrontation between the U.S. and China. The remarks by Ms. von der Leyen and Mr. Michel, in contrast, reflect growing wariness of an increasingly assertive China and a greater willingness to push back.”

Pocket change

Apple's new processors give it even more power over developers.

The tech giant is moving on from a partnership with Intel: “Apple announced new chips for its Macs, which the company said would make the computers more power efficient. But some worried about a different kind of power: the kind Apple wields over its developers,” Reed Albergotti reports.

“Apple is switching from Intel processors, which it has used for more than a decade, to custom-designed chips made by Arm, a British company owned by the Japanese conglomerate Softbank. The change, which Apple announced at its WWDC developer event, is no small thing … Some developers are concerned that chaos will mean opportunity for Apple, which for years has been making efforts to get developers on the Mac to distribute their products through the Mac App Store. Apple gets a hefty cut of all revenue generated through the App Store and imposes strict limitations on what the software is allowed to do.”

Wirecard plunged into chaos: Wirecard said that 1.9 billion euros ($2.1 billion) it had booked in its accounts likely never existed, a black hole that threatens to engulf the payments company and tarnish the reputation of Germany’s financial watchdog,” Reuters's Patricia Uhlig, Karen Lema and John O'Donnell report.

“The one-time investor darling is holding emergency talks with its banks, which are owed roughly 1.75 billion euros, to avert a looming cash crunch triggered by the missing money. The episode marks a dramatic turn in the fortunes of a homegrown tech firm that attracted some of the world’s biggest investors before a whistleblower alleged that it owed its success in part to a web of sham transactions.”

The regulators

NYSE makes new push for IPO alternative.

The move has the potential to transform the IPO market: The New York Stock Exchange (NYSE) submitted an amended rule change with the U.S. Securities and Exchange Commission (SEC) …  in a bid to enable companies that debut on the stock market through a direct listing to raise capital,” Reuters's Joshua Franklin reports.

“The SEC declined an earlier request by NYSE in December to allow companies going public through direct listings to sell stock. It did not disclose the reasons for its decision at the time.”

SCOTUS sets limits on SEC's power to recover ill-gotten gains: “The court reaffirmed the agency’s authority to seek disgorgement, a part of its civil enforcement arsenal aimed at passing on funds acquired in fraudulent schemes to the original investors,” Reuters's Lawrence Hurley and Andrew Chung report.

“But the 8-1 ruling, authored by liberal Justice Sonia Sotomayor, limited the scope of what can be sought via disgorgement to no more than the net profits of the conduct at issue. The court also decided that disgorgement generally must go to investors.”

Daybook

Today:

  • The Senate Banking Committee holds a hearing on the Ex-Im bank, president and chairman Kimberly Reed is set to testify
  • The House Budget Committee holds a hearing on covid-19 and health and wealth inequality
  • La-Z-Boy Inc is among the notable companies reporting its earnings

Wednesday:

  • J.C. Penney, Pier 1 Imports, KB Home and Winnebago Industries Inc are among the notable companies reporting their earnings

Thursday:

  • The Labor Department releases the latest weekly jobless claims
  • Nike, Rite Aid and Darden Restaurants Inc are among the notable companies reporting their earnings

The funnies

Bull session