Las Vegas Democratic Debates: What Investors Should Listen For

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The Democratic playing field certainly has its share of progressive economic policies. Many market participants and analysts see those policies as a near-term danger to stocks and investors may want to pay attention to how aggressively these policies will push for higher taxes.

Stocks have enjoyed a continuation of a strong 2019 into 2020. The S&P 500 has gained almost 5% on the year, which comes on the back of fading coronavirus concerns and is predicated on the promise of loose financial conditions and the hope of a reaccelerating economic growth picture in the U.S.

But one of the biggest risks to the market — while a potential positive for better economic balance — is a Democratic win of the presidential election. Democrats are likely to push Congress for higher personal and corporate taxes, reversing President Trump’s currently-in-place corporate tax regime that is much lower (21%) than the 25% before retook office.

Here’s what investors should pay attention to in the debate Wednesday evening:

Will the policy proposals from Bernie Sanders, Elizabeth Warren and Pete Buttigieg push the rest of the candidate field further to the left? Michael Bloomberg has already included in his playbook a policy that would apply a tax rate to large financial transactions like mergers and acquisitions.

On whether there is a real chance that Sanders’ and Buttigieg’s popularity is moving other candidates towards the left, “the answer is yes,” said James Ragan, director of wealth management research at D.A. Davidson. "Most of the candidates, if not all, have more left leaning candidates and it does pose some risk to the markets.”

Investors are therefore likely to focus in on the following:

How high will corporate and individual tax increases be in light of promises like Medicare For All, lowered college tuition and affordable housing?

Buttigieg’s affordable housing policy proposal would require $430 billion in federal spend, according to his website. His plan for lower tuition costs would involve roughly $500 billion of spend. Combined with his other programs, namely Medicare for all, the trillions of dollars of government spend would only add to a budget deficit investors are already nervous about for the long-term.

As for industry regulation, investors will listen for details on proposed policies like banking, tech and prescription drug price regulation, with the first two being primarily proposed by Sanders and Warren.

Breaking up large banks "would be disruptive,” Ragan said. "The devil might be in the details.” Most bank investors would rather own large banks that have commercial and investment banking businesses than owning banks that have been split up, but until more details are unrelieved, it’s hard to discern the real impact.

Longer-term, separating large banks could reduce systemic risk. “In the event of another crisis, there’s probably more risk today in terms of having it centered on a few banks, but because the capital ratio’s are much stronger, there’s less risk,” Ragan said. 

 Simply put, regulation post financial crisis forced banks to set aside more emergency capital in the event of a crisis, but to the extent that there is systemic risk, separating banks would spread risk more evenly and for the better.

For all policies, "It has to be taken with a grains of salt,” said Mike Loewengart, head of investment strategy at E-Trade. "What candidates talk about doesn’t always transpire once in office."

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