By Nigam Arora
While momentum investors are increasingly focused on ever-higher stock prices, prudent investors should start focusing on the presidential election.
Democratic front-runner Joe Biden released his “Buy American” economic plan to challenge President Trump. Still, investors need to ask how Biden would pay for the plan. He could take away Trump’s tax cuts for corporations and the rich. But Biden and Trump might also share a strategy: Borrow more and influence the Federal Reserve to print more money.
Readers know that I am politically agnostic. My sole job is to help investors.
Let’s explore the issue by reviewing the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA -0.74% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.82% .
Note the following:
• Based on Biden’s tax policies, the stock market in theory could drop, and it could find support at a buy zone. That would be 20% lower than where it is today.
• Prudent investors should protect themselves.
• From 2012 to today, the majority of the rise in the stock market is attributable to the Federal Reserve’s enlarged balance sheet and lower interest rates. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”
• The big money is hiding in the five large-cap tech stocks of Apple /zigman2/quotes/202934861/composite AAPL +2.34% , Amazon /zigman2/quotes/210331248/composite AMZN +1.20% , Microsoft /zigman2/quotes/207732364/composite MSFT +2.34% , Alphabet /zigman2/quotes/205453964/composite GOOG +1.21% /zigman2/quotes/202490156/composite GOOGL +1.15% and Facebook /zigman2/quotes/205064656/composite FB +3.91% . Those five stocks are experiencing a significant “pile-on” effect — buying for reasons that have nothing to do with fundamentals.
• Keep an eye on stocks that would benefit from the Biden plan. Examples include Tesla /zigman2/quotes/203558040/composite TSLA +0.14% , Canopy Growth /zigman2/quotes/200603886/composite CGC -1.75% and Centene /zigman2/quotes/208900023/composite CNC -0.34% .
Five contributors to a stock market drop
Here is a simple calculus of what, in theory, should happen with Biden’s tax policy.
• Biden would be likely to increase the capital gains tax, perhaps as high as 39% for upper-income individuals. That could lead to selling before such a law were passed.
• Due to higher corporate tax rates, S&P 500 /zigman2/quotes/210599714/realtime SPX +0.27% earnings would take about a 7% hit.
• Due to more regulation, S&P 500 earnings would take a 2%-3% hit.