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Morning Notes — SPX Levels

SPX Levels

October 22, 2020

Election: For this publication, a ‘Democrat sweep’ is defined as a Biden victory and Democrat-controlled Senate.  A blue wave scenario is defined as a Biden landslide win plus a 6-8 seat swing in the Senate.  A Democrat sweep could result in relatively benign policy changes, while a blue wave scenario could result in Democrats pursuing their worst instincts.  Yesterday, we discussed the fiscal spending implications of a possible Democrat sweep.  Some market strategists feel more is better when it comes to fiscal spending.  But like all systems, a healthy economy requires balance, and higher spending will deliver higher bond yields and potentially uncomfortable downside for the US dollar.  The US economy requires balance and markets prefer a balance of power in Washington. 

More than spending: Markets expect a Democrat-controlled Senate would result in higher tax rates and increased regulation.  Those twin headwinds would increase under a blue wave scenario.  Joe Biden is characterized as a ‘moderate’ Democrat who’s campaigning on a tax plan that would deliver: 1) corporate tax rate increase from 21% to 28%; 2) the 12.4% payroll tax that currently only applies to earned income under $137,000 would be expanded to include all income over $400,000 as well; 2) the top marginal rate for individuals would increase +2.6% to 39.6%; 3) households making over $1,000,000 would have their long-term capital gains and qualified dividends taxed as ordinary income; 4) the step-up in basis, which revalues assets to the time of inheritance without incurring a tax liability would be eliminated and; 5) the Biden-Sanders Unity Task Force proposed raising estate taxes to the ‘historical norm,’ which could mean the current lifetime exemption of $11.58 million for individuals ($23.6 million for married couples) would be cut to ~$5.5 million ($11 million is married) or even lower.  A Democrat sweep would make Ron Wyden the majority ranking member of the Senate Finance Committee.  And Senator Wyden has proposed a ‘mark-to market’ plan that would tax the unrealized capital gains of the highest-earning taxpayers annually, at ordinary income tax rates.  If ‘highest-earning taxpayers’ refers to the highest Federal tax bracket, this rule would apply to individuals earning over $518,400 a year (married filing jointly earning over $622,050).  

More than taxes: The Biden-Sanders unity committee whitepaper has proposed a public health care option administered by the Federal government, with automatic enrollment for the ~5m Americans who find themselves in a coverage gap between their own states’ Medicaid eligibility and current ACA subsidies.  Sounds harmless enough, but the white paper goes on to say the public option will be made available to all Americans.  With this, you have to consider arbitrarily low, uneconomical government reimbursement rates that would cannibalize ACA enrollment almost immediately and employer group enrollment over time. The key word in the prior sentence is ‘uneconomical.’  Also consider that Health Care is the largest sector of the US economy.  A blue-wave scenario that includes an end of the Senate filibuster rule, could push the concept dangerously close to reality. 

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