Trump or Biden? How the US Presidential election will impact the stock market

 

US stocks are falling and volatility is going to increase as the US election head to a close on November 3rd. However, this is a systematic fall, meaning every stock in every sector is falling. Every sector save for a few healthcare stocks is down – irrespective of earnings. Why would Amazon stocks fall, even as demand is up?  This is a big market “tell” that the market sell-off has nothing to do with fundamentals.

Image 1 shows the Standard & Poor 500 index stocks categorized by sectors and industries.

Another key indicator that shows the market’s hand is the “VIX” – the trading symbol for the CBOE Volatility Index – that measures the implied volatility of the S&P 500 index. The VIX is muted, it’s up slightly – but nowhere near the levels seen in March and July of this year. What this tells us is that the market is less fearful. In other words, this is a planned sale by institutional investors not driven really by COVID-19 or stimulus fears.

Image 2

Why are all sectors in the market falling? The answer is simple; Investors are hedging against a Joe Biden victory in November.

Joe Biden‘s tax plan calls for an across the board tax hike on income, including Capital Gains taxes. This means if you filed as a single, bought the US Stocks in 2016 by buying the Vanguard Total Stock Market Index Investor (VTSMX), your return in 2019 would have been 52.2%. This return would have triggered a capital gains tax of 20%, if your income exceeded $441.451 as a single filer.

Image 3

Donald Trump on the other hand will tax long-term capital gain at 39.6$% on income above $1m. The maths is simple, investors that have made money in the stock market under the Trump tax cuts have an incentive to sell their stocks today or buy a Put option – to take in cash today and wait.

If Biden wins, they pay Capital gains taxes at the lower 20%; if Trump wins, they already have banked on their cash.

Can you see the opportunity?

If Trump wins, these investors have to buy back those shares. Thus, a Trump victory and the Republican Party retaining the Senate will see a stock market bump, as traders buy shares to cover their Put options.

This is a simple play – if you think Trump will win, buy the market and go bullish.