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July 11, 2020, 8:25 a.m. EDT

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

Higher taxes and more regulations would cut corporate profits

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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 with the help of a chart.

Chart

Please click here for an annotated chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA -0.34% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.38% . Note the following:

• The chart is monthly, giving investors a long-term perspective.

• The chart shows the middle support zone.

• The chart shows that based on Biden’s tax policies, the stock market in theory should drop to the middle buy zone. This is about a 20% drop in the stock market.

• Prudent investors should protect themselves from the tail risk of the stock market falling to the “mother of all support zones” shown on the chart.

• The chart shows Arora buy signals and calls for the Dow Jones Industrial Average to reach 30,000 points. From 2012 to today, the majority of the rise in the stock market is attributable to the Fed’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 -2.97% , Amazon /zigman2/quotes/210331248/composite AMZN -2.14% , Microsoft /zigman2/quotes/207732364/composite MSFT -2.34% , Alphabet /zigman2/quotes/205453964/composite GOOG -1.05%   /zigman2/quotes/202490156/composite GOOGL -1.09%  and Facebook /zigman2/quotes/205064656/composite FB -2.61% . 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 -3.11% , Canopy Growth /zigman2/quotes/200603886/composite CGC -5.47%  and Centene /zigman2/quotes/208900023/composite CNC -0.19% .

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.

/zigman2/quotes/208954582/composite
US : U.S.: NYSE Arca
$ 277.19
-0.95 -0.34%
Volume: 4.53M
Aug. 11, 2020 4:00p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,686.91
-104.53 -0.38%
Volume: 430.09M
Aug. 11, 2020 5:08p
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 437.50
-13.41 -2.97%
Volume: 46.88M
Aug. 11, 2020 4:00p
P/E Ratio
33.25
Dividend Yield
0.75%
Market Cap
$1927.93 billion
Rev. per Employee
$1.98M
loading...
/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,080.67
-67.49 -2.14%
Volume: 3.71M
Aug. 11, 2020 4:00p
P/E Ratio
118.41
Dividend Yield
N/A
Market Cap
$1576.88 billion
Rev. per Employee
$359,671
loading...
/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 203.38
-4.87 -2.34%
Volume: 36.39M
Aug. 11, 2020 4:00p
P/E Ratio
35.31
Dividend Yield
1.00%
Market Cap
$1575.96 billion
Rev. per Employee
$902,473
loading...
/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 1,480.32
-15.78 -1.05%
Volume: 1.45M
Aug. 11, 2020 4:00p
P/E Ratio
33.02
Dividend Yield
N/A
Market Cap
$1017.84 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 1,480.54
-16.28 -1.09%
Volume: 1.55M
Aug. 11, 2020 4:00p
P/E Ratio
33.02
Dividend Yield
N/A
Market Cap
$1017.84 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 256.13
-6.87 -2.61%
Volume: 28.21M
Aug. 11, 2020 4:00p
P/E Ratio
31.29
Dividend Yield
N/A
Market Cap
$749.10 billion
Rev. per Employee
$1.57M
loading...
/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 1,374.39
-44.18 -3.11%
Volume: 8.40M
Aug. 11, 2020 4:00p
P/E Ratio
715.27
Dividend Yield
N/A
Market Cap
$264.37 billion
Rev. per Employee
$439,627
loading...
/zigman2/quotes/200603886/composite
US : U.S.: NYSE
$ 16.95
-0.98 -5.47%
Volume: 5.10M
Aug. 11, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$6.65 billion
Rev. per Employee
$115,039
loading...
/zigman2/quotes/208900023/composite
US : U.S.: NYSE
$ 62.88
-0.12 -0.19%
Volume: 2.76M
Aug. 11, 2020 4:02p
P/E Ratio
22.01
Dividend Yield
N/A
Market Cap
$36.51 billion
Rev. per Employee
$1.27M
loading...
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