Election 2020

Will 2020 Democrats Spook the Stock Market?

If so, it could undercut one of Trump's best re-election selling points: the strong economy.

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"Political risk" used to be something American investors worried about in connection with foreign countries. It had to do with assessing the likelihood that a dictator would seize power and decide to nationalize the oil industry or the banks. Or that a war would break out and close shipping lanes.

Increasingly, though—and especially headed into the 2020 presidential election—political risk is looming over the U.S. domestic economy and financial markets.

I'm not talking about the risk of President Trump starting a trade war with China, Canada, Mexico, or Europe, though investors have reacted to that threat at times, too.

The bigger concern is the chance that a Democrat will spook the stock markets by appearing likely to defeat President Trump. In a worst-case scenario for Trump, this can even be a self-fulfilling prophecy: the stock market declines in anticipation of his potentially losing, and the decline then undercuts one of Trump's best re-election selling points, the strong economy.

A big part of the story is taxes. An underappreciated political fact of the past 30 years in America is that every president has changed the tax rates. In the three decades between 1988 and 2018 America had six presidents. The best of them, Ronald Reagan, left office with the top individual income tax rate at the lowest level: 28 percetnt. George H.W. Bush raised it to 31 percent. Bill Clinton raised it to 39.6 percent. George W. Bush lowered it to 35 percent. Barack Obama raised it back to 39.6 percent. Donald Trump lowered it to 37 percent.

Those top marginal rates don't tell the whole tax story. Clinton and congressional Republicans cut the capital gains tax to 20 percent from 28 percent. George W. Bush cut taxes on dividends and long-term capital gains to 15 percent. And Trump cut the corporate tax rate to 21 percent from 35 percent.

For investors, though, a U.S. tax increase has a similar effect to a third-world dictator seizing a previously profitable private enterprise. It amounts to the government taking property away from the people who had previously thought they owned it. That does not inspire confidence. Instead, it erodes it.

Ideally, property rights are fixed and based on a predictable rule of law. The oscillating tax rates instead feed the perception that how much of what you earn the government will allow you to keep is dependent on which political party happens to occupy the White House.

One needn't be an expert soothsayer to predict that if a Democrat defeats Trump in the 2020 presidential election, taxes will increase. Joe Biden was vice president during the Obama tax increases. Bernie Sanders is a self-described socialist who ran in 2016 with a plan to raise the top federal individual income tax rate to 54.2 percent and to tax dividends and capital gains as ordinary income. Pete Buttigieg has said "Tax cuts for the wealthiest…some of 'em are gonna have to be reversed." Elizabeth Warren has proposed raising taxes by $2.75 trillion over ten years with a new "wealth tax."

Beyond the overall threat posed by tax increases, the Democrats also could endanger specific sectors of the economy.

A "green new deal" or similar efforts to combat climate change by rapidly changing American energy policy might be good for electric car companies, solar-panel installers, and wind-turbine technicians, but trouble if you own an oil or gas pipeline, refinery, or drilling company.

Medicare-for-all or similar pushes for increased government involvement in health care could hurt profits of health insurance companies and the pharmaceutical industry. Axios reports that even Republicans are getting ready to gang up on the drug companies, raising the possibility of a bipartisan deal this year on the issue. The New York Times paraphrased a Goldman Sachs analyst, Stephen Tanal, as saying that "fear of government intervention would probably weigh on health care share prices 'perhaps until the presidential election itself.'"

Democrats respond to these concerns by citing analyses that the stock market does well in Democratic administrations, or by warning that Republican tax cuts, if "paid for" by borrowing to cover deficits, could eventually precipitate a financial crisis. Some of them also argue that the stock market or the overall economy is driven by business cycles largely unrelated to marginal tax rates.

What the studies about stock market performance during Democratic administrations don't account for, though, are expectations-based sell-offs that precede those administrations. So, for example, looking at the performance of the stock market during President Obama's term would ignore the nearly 20 percent plunge that took place after Obama was elected but before he was inaugurated, and it'd give Obama credit for the 6 percent rise between when President Trump was elected and when Trump was inaugurated. Control of Congress matters, too—some of the stock market gains during the Clinton and Obama years were racked up when Republicans in Congress put some constraints on Democrats in the White House.

U.S. politics aren't the only factor affecting stock prices. Monetary policy and global trends matter, too. Long-term savers think about periods longer than a presidential term. If Trump is re-elected, the tax plans of Sanders and Warren will be irrelevant. But until Election Day, investors who entirely ignore U.S. political risk do so at their own peril.

Ira Stoll is editor of FutureOfCapitalism.com and author of JFK, Conservative.

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  1. Someone writing for reason who opposes taxes. Does Sudderman know about this?

    1. Looks like it surprised you of all people Who’d’a thunkit?

    2. I guess you’ve never heard the battle cry of libertarians: Taxation is theft!

      Or maybe it’s just the battle cry of an-caps like me, I don’t know.

    3. I guess you’ve never heard the battle cry of libertarians: Taxation is theft!

      1. The squirrels are back.

  2. Most voters understand that Drumpf has nearly destroyed our economy just like Paul Krugman predicted. If there are any economic indicators that still look healthy, it’s just leftovers from the Obama era — the strongest 8-year run in US history.

  3. Clingers gonna cling to discredited dogma and partisan polemics. Mainly because there are no better ways to try to maintain an electoral coalition for backwardness and ugly intolerance in modern America.

    Evidence indicates Democrats, not Republicans, are better for the economy, in several ways.

    Most people who are smart enough to influence the economy at a large scale are also smart enough to recognize that Trump is a reckless, vainglorious, counterproductive lightweight.

    1. “Most people who are smart enough to influence the economy at a large scale are also smart enough to recognize that Trump is a reckless, vainglorious, counterproductive lightweight.”

      Exactly right. This is consistent with the pattern that has been evident for decades — the Republicans get the bulk of their support from the poorest voters, and the more money people have the more likely they are to vote Democrat.

    2. You are boring, and an asshole.

  4. “”Will 2020 Democrats Spook the Stock Market?”‘

    If they do, the dems will blame Trump.

  5. <blockquote cite="Democrats respond to these concerns by citing analyses that the stock market does well in Democratic administrations, or by warning that Republican tax cuts, if "paid for" by borrowing to cover deficits, could eventually precipitate a financial crisis."

    Funny how cutting spending to "pay for" tax cuts never occurs to any of them.

    1. OK, this new commenting system sucks ass. They took away Preview and changed how some of the html tags work.

      Fuck you Reason.

  6. One needn’t be an expert soothsayer to predict that if a Democrat defeats Trump in the 2020 presidential election, taxes will increase.

    If this happens, midterm elections will be entertaining, to say the least.

  7. no because they won’t win

  8. >>>The bigger concern is the chance that a Democrat will spook the stock markets by appearing likely to defeat President Trump.

    c’mon.

  9. Republican asset-forfeiture looting rooted in prohibitionist fanaticism is what mostly wrecked the economy in 1929, 1933, 1987 and 2008. It also caused the Flash Crashes of 2010 and 2015, before coercive mechanisms were put in place to disguise these types of crashes. The Dems, like the other looters, seek to place electric power plants under schedule 1 controls, kind of like meth labs. Both kleptocracy parties give voters excellent reasons for casting platform-changing libertarian spoiler votes.

    1. I’m pretty sure asset forfeiture is most abused in Democrat controlled states.

      Probably because they’re bigots and racist like Tony and Reverend.

    2. “Platform-changing libertarian spoiler votes.”

      They are not spoiler votes. Voting for either of the two idiot parties are stupid votes, that’s all. What kind of dumbass actually wants some power-hungry stranger to control his life instead of making his own decisions like a grown-up?

      Someone who tells you, “Look, I’m so smart I know what’s best for you much more than you do,” deserves not your vote, but to be told “fuck off, slaver!”

      1. >>>What kind of dumbass actually wants some power-hungry stranger to control his life instead of making his own decisions like a grown-up?

        love it.

  10. Will 2020 Democrats Spook the Stock Market?

    No. They’ve been trying this since he won the election.

    It’s a known factor now.

    1. The tongue-hanging-out emoticon doesn’t convert to an emoji so DON’T USE IT, FUCKSKEEZIX.

  11. If it looks like the dems are gonna win, invest in metals I say- for the GND (metal extraction itself of course is not so green, but who cares about details when you can have feels), and in gold, which you will need once the dollar becomes nearly worthless.

  12. I’m really torn on what to do financially… I’m basically ready to invest in some rental properties… But the economy has all the indicators that a recession should be coming, and god forbid if Trump loses… RE prices themselves are also on the high side historically even where I’m considering investing. Waiting it out and stacking cash for another year or two seems not entirely unreasonable, but even if prices drop, will it be enough to offset lost gains from holding off another year or two?

    Decisions, decisions.

  13. Of course the threat of socialism should spook the stock market. Unless you’re in the helicopter business.

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