The cost of Biden’s economic plan to the stock market is more than you might think

By Nigam Arora

Rick Bowmer

Joe Biden

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 +1.34% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.34% .

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 +3.75% , Amazon /zigman2/quotes/210331248/composite AMZN +2.49% , Microsoft /zigman2/quotes/207732364/composite MSFT +2.28% , Alphabet /zigman2/quotes/205453964/composite GOOG +1.17%   /zigman2/quotes/202490156/composite GOOGL +1.14%  and Facebook /zigman2/quotes/205064656/composite FB +2.12% . 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 +5.04% , Canopy Growth /zigman2/quotes/200603886/composite CGC -0.70%  and Centene /zigman2/quotes/208900023/composite CNC +2.04% .

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 +1.60%  earnings would take about a 7% hit.

• Due to more regulation, S&P 500 earnings would take a 2%-3% hit.

/zigman2/quotes/208954582/composite

Add to watchlist DIA

SPDR Dow Jones Industrial Average ETF Trust

US : U.S.: NYSE Arca

$ 271.70

+3.60 +1.34%

Volume: 3.61M

Sept. 25, 2020 4:00p

/zigman2/quotes/210598065/realtime

Add to watchlist DJIA

Dow Jones Industrial Average

US : Dow Jones Global

27,173.96

+358.52 +1.34%

Volume: 391.73M

Sept. 25, 2020 5:06p

/zigman2/quotes/202934861/composite

Add to watchlist AAPL

Apple Inc.

US : U.S.: Nasdaq

$ 112.28

+4.06 +3.75%

Volume: 149.98M

Sept. 25, 2020 4:00p

P/E Ratio

34.13

Dividend Yield

0.73%

Market Cap

$1946.64 billion

Rev. per Employee

$1.98M

/zigman2/quotes/210331248/composite

Add to watchlist AMZN

Amazon.com Inc.

US : U.S.: Nasdaq

$ 3,095.13

+75.34 +2.49%

Volume: 4.62M

Sept. 25, 2020 4:00p

P/E Ratio

118.97

Dividend Yield

N/A

Market Cap

$1550.32 billion

Rev. per Employee

$359,671

/zigman2/quotes/207732364/composite

Add to watchlist MSFT

Microsoft Corp.

US : U.S.: Nasdaq

$ 207.82

+4.63 +2.28%

Volume: 29.44M

Sept. 25, 2020 4:00p

P/E Ratio

36.08

Dividend Yield

1.08%

Market Cap

$1572.71 billion

Rev. per Employee

$902,473

/zigman2/quotes/205453964/composite

Add to watchlist GOOG

Alphabet Inc. Cl C

US : U.S.: Nasdaq

$ 1,444.96

+16.67 +1.17%

Volume: 1.32M

Sept. 25, 2020 4:00p

P/E Ratio

32.23

Dividend Yield

N/A

Market Cap

$980.76 billion

Rev. per Employee

$1.39M

/zigman2/quotes/202490156/composite

Add to watchlist GOOGL

Alphabet Inc. Cl A

US : U.S.: Nasdaq

$ 1,439.06

+16.20 +1.14%

Volume: 1.52M

Sept. 25, 2020 4:00p

P/E Ratio

32.10

Dividend Yield

N/A

Market Cap

$980.76 billion

Rev. per Employee

$1.39M

/zigman2/quotes/205064656/composite

Add to watchlist FB

Facebook Inc. Cl A

US : U.S.: Nasdaq

$ 254.82

+5.29 +2.12%

Volume: 18.35M

Sept. 25, 2020 4:00p

P/E Ratio

31.13

Dividend Yield

N/A

Market Cap

$725.94 billion

Rev. per Employee

$1.57M

/zigman2/quotes/203558040/composite

Add to watchlist TSLA

Tesla Inc.

US : U.S.: Nasdaq

$ 407.34

+19.55 +5.04%

Volume: 67.21M

Sept. 25, 2020 4:00p

P/E Ratio

1,060

Dividend Yield

N/A

Market Cap

$379.56 billion

Rev. per Employee

$439,627

/zigman2/quotes/200603886/composite

Add to watchlist CGC

Canopy Growth Corp.

US : U.S.: NYSE

$ 14.17

-0.10 -0.70%

Volume: 3.44M

Sept. 25, 2020 4:00p

P/E Ratio

N/A

Dividend Yield

N/A

Market Cap

$5.24 billion

Rev. per Employee

$115,039

/zigman2/quotes/208900023/composite

Add to watchlist CNC

Centene Corp.

US : U.S.: NYSE

$ 55.41

+1.11 +2.04%

Volume: 3.88M

Sept. 25, 2020 4:03p

P/E Ratio

19.37

Dividend Yield

N/A

Market Cap

$32.11 billion

Rev. per Employee

$1.27M

/zigman2/quotes/210599714/realtime

Add to watchlist SPX

S&P 500 Index

US : S&P US

3,298.46

+51.87 +1.60%

Volume: 2.18B

Sept. 25, 2020 5:06p