What Are the Biggest Political Risks to Stocks?

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How about getting straight into it?

The first—and most near-term risk—to stocks is fiscal policy. Monetary policy, or policy enforced by central banks, has done wonders for the virus-plagued economy. Interest rates can’t go much lower. Fiscal policy, or spending and tax policy enforced by other areas of the government, was also instrumental in April and May. Checks directly to households enabled laid off or furloughed workers to keep spending.

But now the coronavirus is spreading widely again and the market is hoping Congress has more political will—and fiscal spending—to allocate more money to households.

Medium-term, we have the election.

Joe Biden wants to raise corporate taxes to 28% from the current 21%. To the extent that he is able to pass that policy through Congress, the market will price that into earnings estimates fairly quickly. Biden is progressive and wants to reallocate government dollars to more needy cohorts of the economy. Additionally, some on Wall Street are noting that growing government debt needs to be funded by a strong tax revenue stream, which may actually create more will to raise taxes.

Long-term, the U.S.-China relationship has deteriorated.

President Trump’s policies of tariffs and restrictions have increased input costs for U.S. companies, forced demand-destroying price increases, and pressured business confidence, which then pressures investment and hiring.

Trump may pursue some form of a trade deal with China, but is also inclined to punish the country if he sees necessary. These dynamics have brought to light the underlying issues behind the seemingly harmonious trade deal between the countries that has been in place for years. Some of those issues center on intellectual property theft.

Biden, should he win the election, does not want to add tariffs and aggressive policies. But t the same time, he cannot strike a conciliatory tone with China, as the era of unscrutinized trade and economic exchange with China is feared by investors to be coming to a close.

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