Stocks fell considerably Tuesday as Wall Street is beginning to focus on political outcomes. The S&P 500 fell 1.08%, while the 10-Year Treasury yield fell to 0.64%. Yields fall when prices rise. The tech-heavy Nasdaq fell 0.86%, all sectors ended the day lower on Tuesday, and investors are eyeing the 2020 election.
Former Vice President Joe Biden's chances of winning in November, according to RealClearPolitics, stands at 56%, while Trump’s chances are at 39%. While Biden’s recent strength since late March has come at a time when the S&P 500 has rallied roughly 40%, he does pose some market risk. A lowered corporate tax rate, which would bring earnings down drastically, is just one potential headwind. If Biden’s hope to raise corporate taxes to 28% from the current 21% is realized, most sectors would be adversely impacted.
Biden also poses a threat to the healthcare sector with heavy regulation. He also wants to raise taxes on wealthy individuals.
Importantly, if Republicans can maintain a decent position in the Senate, these policies may have to involve compromise, making their market and economic impact less costly. It's also important to note that historically, a split Congress leads to 17% S&P 500 gains for the year after an election, according to research for LPL Financial. A Democratic Congress leads to 10% gains, with 13% gains for a Republican Congress.
Still, it was cyclical sectors falling the hardest Tuesday, with investors favoring growth tech that can power through economic headwinds, suggesting some of the risk-off sentiment was related to worries over lockdowns or halted re-openings in the face of a worsening coronavirus situation in the U.S. Large cap oil, bank, consumer discretionary and industrial stocks fell between 1% and 3%.
Elsewhere, Walmart (WMT) - Get Walmart Inc. Report rose 6.78%, as it is reportedly soon to launch a $98 per year subscription called Walmart+. That would rival Amazon’s (AMZN) - Get Amazon.com, Inc. Report Amazon Prime. Amazon shares fell 1.86%.
Walmart+ would offer groceries and discounted products in other categories. This reflects Walmart’s wish to leverage its scale to compete in e-commerce and continue taking market share in groceries and other categories. But not even a large up-move of the $300 billion market cap Walmart could move the S&P 500 close to a gain on the day.
Here’s what Wall Street’s saying:
Team, Global Wealth Management, UBS:
"While positioning portfolios today for a specific outcome in November is ill-advised, it’s important to recognize that Trump and Biden have promulgated divergent economic and fiscal policies. In a second term, we believe President Trump would focus on deregulation, an “America first” approach to international trade, and tax reductions (which may consist of making permanent and perhaps expanding the tax cuts in the 2017 Tax Cuts and Jobs Act). By contrast, Joe Biden would seek to increase spending on climate change mitigation, expand access to federally funded healthcare, and raise taxes on corporations and high-income earners. The need for more infrastructure investment is among the few issues on which both candidates agree, but neither candidate has outlined how to pay for the public improvements.”
Ryan Detrick, Senior Market Strategist, LPL Financial:
"2020 is an election year, and as we get closer to November, we expect this to replace COVID-19 and the recession at the top of investors’ minds. The makeup of Congress may influence stock market performance, and how stocks and the economy perform prior to the election may forecast who will win. The makeup of Congress is very important. Markets tend to be volatile ahead of elections because of the uncertainty around possible policy changes. In this election, the stakes are particularly high for corporate America because a takeover of the Senate by Democrats and a possible Biden victory reportedly may lead to an increase in the corporate tax rate from 21% to 28% and unwind the corporate earnings boost the 2017 Tax Cut and Jobs Act delivered.”