Your Vote Matters Now More Than Ever – Part 3

The last couple weeks I’ve been discussing the upcoming election (if you haven’t seen my emails, you can check them out here: Part 1: Overview and Part 2: Taxes ). If you watched the Presidential Debate Tuesday night, you may have been as unimpressed as I was. However, some of the topics that I touch on were addressed during the debate when the candidates paused long enough to stop bickering ? This week we’re going to look at what we can expect from each candidate relating to regulation/de-regulation.

What to Expect From a Trump Second Term — De-Regulation

De-regulation has been a priority for the Trump administration, particularly in the financial services and energy sectors, and one that we fully expect to continue in a potential second term. However, the impact of de-regulation has not been reflected in relative sector performance in the S&P 500. That doesn’t mean de-regulation wasn’t economically supportive—only that the policy impact was overwhelmed by broader economic forces.

• Small business implications. Increased regulation tends to be more damaging for small businesses than the large publicly traded companies that make up major stock indexes. In fact, large companies sometimes benefit from regulations at the expense of small companies because of their ability to scale their regulatory response. Small business confidence picked up substantially with Trump’s election, according to the National Federation of Independent Business’ Small Business Optimism Index. This measure had been increasing since the financial crisis in 2008–09, but immediately following Trump’s election, it jumped to multi-decade highs and maintained those levels until the pandemic hit. Whether Trump can inspire a recovery to previous levels will be a stern test in a second term that’s still likely to be dominated by COVID-19 and the devastating effects that it has had, especially on small businesses.
• Immigration policy. This has been an area where the Trump administration has increased regulatory costs, which are likely to continue into a second term. Stricter polices and enforcement have reduced labor flexibility for businesses and shrunk the available labor pool, especially for specialized skills. A new campaign pledge to prohibit American companies from replacing US citizens with lower-cost international workers may exacerbate this.
• Energy regulation. Support for energy companies and specifically fossil fuels appears to be an ongoing objective for Trump, and he has pledged to “Continue Deregulatory Agenda for Energy Independence” under the aim of creating jobs. Most companies in this sector, excluding those in renewable energy, will likely benefit from a Trump victory.
• Healthcare.  Healthcare receives a lot of attention during campaign seasons because it is very policy-sensitive and, of course, widely used. In this area, Trump versus Biden may be a push. While not going quite as far as Biden, Trump has included policy pledges to lower health insurance premiums, end surprise billing, cover all pre-existing conditions, and lower drug prices. We would not expect a “Medicare For All” policy under any political scenario, though a Trump victory would take an expansion of the Affordable Care Act off the table.

What to Expect From a Biden Presidency — Regulation

• De-regulation has been a clear priority for the Trump administration, with a particular impact on the financials and energy sectors. However, that impact has not been reflected in relative sector performance in the S&P 500. That doesn’t mean de-regulation wasn’t economically supportive—only that the policy impact was small compared to broader economic forces.
• Increased regulation has tended to be more damaging for small businesses than the large publicly traded companies that make up major stock indexes. In fact, large companies sometimes benefit from regulations at the expense of small companies because of their ability to scale their regulatory response. Even if it doesn’t impact stock prices, small business are the soul of the US economy, and overregulation weighs on their potential to thrive. 
• There have also been some areas where the Trump administration has created implicit regulatory costs that would be unwound under a Biden administration.
  • Immigration policy has reduced labor flexibility for businesses and has also reduced the available labor pool, especially for specialized skills. Adjusting to new policies also can come at a high administrative cost.
  • Trade policy has caused large supply chain disruptions at high cost to many businesses, large and small. While this impact cannot be reversed, the effect moving forward may be more manageable under a Biden administration.
• The following sectors and industries may be particularly vulnerable to the regulatory impact of a Biden administration:
  • Financials. Regulation may likely tighten if there’s a Democratic sweep, and even if not, progressive Democrats may fill key regulatory posts. Massachusetts Senator Elizabeth Warren may see increased influence, but the former presidential candidate is unlikely to receive a cabinet appointment, since Massachusetts’ Republican governor probably would appoint a Republican senator to replace her until a special election could be held.
  • Energy. Oil and gas companies may be hurt by a potential Democratic sweep, and there’s a lot that Biden potentially could do independent of Congress. A shift in the treatment of Iran may also increase supply, thus lowering prices. On the other hand, alternative energy is likely to be a priority for a Biden administration.
  • Healthcare. Biden was an opponent of “Medicare for All,” and the most likely policy implication may be an update or potential expansion of the Affordable Care Act (ACA). Drug pricing may continue to be a risk under either party. Healthcare providers may benefit from broader coverage.

Our Focus

As I’ve said each week, for now our focus is strictly on the market impact of the election, with the economy also a secondary concern, since that feeds into market impact. Our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets.

I’ll reiterate, I am not a political expert, but am very concerned about the election. As John F. Kennedy said:

“Let us not seek the Republican answer or the Democratic answer, but the right answer.

Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.”

I believe the best thing we can do is educate ourselves. Find not the Republican answer or the Democratic answer, but the right answer. Pray with me that our nation would come together as one. I know it feels like a long shot, but miracles do and will happen.

Next week we’ll review what to expect from each candidate on initiatives and governance.

Eventually, I’ll wrap up this series with some “non-economic” thoughts. More on that to come.