Sanders Thrives, Buttigieg Drops Out - Here's How the Primaries Could Impact Markets

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Here's the bottom line for stock investors: a Bernie Sanders or Elizabeth Warren presidency could put a dent in the stock market, but stocks will likely remain the best financial asset in the world to own for the foreseeable future. 

The S&P 500 corrected by as much as 14.5% from its all-time high in last week's ugly correction, largely driven by the clear global economic impact of the coronavirus. 

But the threat of higher corporate taxes and potentially higher individual taxes posed by a Sanders or Warren presidency is a grave one to the market. Progressive Pete Buttigieg dropped out of the race, but the far left policies are on the table for the rest of the field to pick up, should candidates fell they must do so.

 Policies ranging from free medicare for all, affordable college tuition and affordable housing will all require changes to fiscal policy that could dent corporate earnings. Bernie Sanders, one of the most progressive candidates with a meaningful chance to win the presidency in many years, is currently leading the Democratic pack. 

And the recent sell-off may have been more due to the election than some might think. 

"They're [investors] certainly factoring in maybe 10% into the current downdraft [last week's correction] the possibility that he [Sanders] becomes president and enacts capitalist unfriendly policies," said Dev Kantesaria, Managing Director at Valley Forge Capital Management, which has $600 million under management, said. "They factor it [election downside] into their risk models."

Also furthering the probability of a Democratic president in 2020 is the fact that the coronavirus is impacting the economy, making Trump's reelection campaign more difficult. 

"History shows that U.S. presidential reelection probabilities are highly dependent on 2Q U.S. GDP growth," wrote Goldman Sachs Strategist David Kostin. "If coronavirus becomes widespread and leads to a slowdown in U.S. growth or a recession,  it could alter current expected election outcomes." 

U.S. GDP growth is expected to fall far less considerably than that of China's, but still by a few basis points. 

It's important to note that, even if Sanders wins, Congress will still likely be divided fairly evenly between Republicans and Democrats, which may force a compromise on policy, reducing the gravity of the market impact. But stocks, especially in the economically favorable U.S. compared to the rest of the world, are still likely to promise the best return compared to any major asset class. 

"I would not sell" if Sanders becomes the clear winner over incumbent President Trump, Kantesaria said. "I still believe that equities represent the best way to grow buying power over the next five to ten years, but any increase in the corporate tax rate will certainly reduce the intrinsic value of U.S equities. You have to pick from the options that you have." 

The riskiest U.S. bonds, for instance offer roughly a 7% rate of return, while safe treasuries offer just above 1%.  

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