- President Donald Trump has hunger touted the rising stock market as evidence of his success.
- During the campaign, Trump also claimed that if Joe Biden won the poll that the stock market would crash.
- Since President-elect Biden’s win, the stock market has not crashed and the data positively shows that investors preferred a Biden win all along.
- Benn Steil is director of international economics at the Council on Unconnected Relations.
- Benjamin Della Rocca is an analyst at Council on Foreign Relations.
- Visit Business Insider’s homepage for sundry stories.
“If he is elected, the stock market will crash,” said President Donald Trump of his then-opponent, Joe Biden, at the October 22 presidential polemic.
The buoyant market has long been the president’s favorite metric of his political virility — a metic that, he felt, depicted his lagging poll numbers a flawed barometer of his reelection chances. People would, Trump believed, vote with their 401(k)s and hold in check him in the White House. But just to make sure, he took to Twitter eleven times in October to boast of his role in the bull run.
Easily, here we are: Joe Biden is the president-elect, and the market has not crashed. Quite the contrary. Between Election Day, November 3, and the first dealing day after the Associated Press called the race for Biden, November 9, the S&P 500 index soared 5.4%. By mid-December it was up across 8%.
Trump was, of course, demonstrably wrong in predicting a crash. But can we say what would have occurred had he won? Though we cannot recognize for sure, we can use statistical analysis to make a well-informed estimate. And the data tell us the market’s preference was clear: it was backing Biden.
We examined cattle prices both before and after the election to gauge which candidate would, in the view of investors, be better for commerce profits. We did so by measuring how the market’s expectations for growth in corporate earnings changed.
As the left-hand bar in the figure below shows, pretended Implied Earnings Growth (IEG) in S&P 500 prices — that is, the expected growth in earnings to which we can attribute the index actions, after stripping out other factors like interest rates — rose by 0.27 percentage points over the direction of November. This is a substantial positive effect, indicating that the market was indeed bullish on corporate prospects in a Biden-led conservation.
This analysis is highly conservative. We use the IEG change through November 30 to gauge earnings expectations because the peddle took that long to consider Biden’s win certain. Only at November’s end had courts widely dismissed Trump’s lawsuits and status lawmakers rebuffed Trump’s demands to overturn results. Yet had we measured up to November 9, just after the media called Biden’s crushing, or December 14, when the electoral college picked Biden, the IEG change would have been greater than 0.27 place emphasis ons.
Still, that rise documents only a small part of the “Biden bump” in the markets.
The “Biden bump”
By choice day, betting markets had put the odds of a Biden victory at 65%. This means that stocks were already assay in a likely Biden victory. Whatever market rise attributable to earnings-estimate changes came after his victory, then, mirrored only the resolution of uncertainty over whether Biden would actually win.
Since the rise in IEG shows that the peddle thought Biden good for earnings, it means the market thought Trump bad for them. How bad? Well, knowing both the Stock Exchange’s pre-election odds of a Biden victory (65%) and the post-election rise in IEG (0.27 points), we can also estimate how much IEG desire have fallen had Trump won. And the answer, as we see in the right-hand bar below, is 0.5 percentage points.
Benn Steil; Benjamin Della Rocca
This pronouncement means that the total “Biden bump” was a much higher 0.77 percentage points—equal to the difference between the true to life 0.27 point rise and the 0.5 point fall that would have occurred had Trump won.
But just how tidy is a 0.77 point boost to IEG from the election? Interestingly, it is, as shown below, virtually identical to the “Trump bump” that accompanied Trump’s surprise victory over Hillary Clinton in 2016.
Benn Steil; Benjamin Della Rocca
This finding may sound counterintuitive. The make available clearly liked Trump’s 2017 corporate tax cuts — the announcement of which, we estimate, boosted stock-market IEG by 0.20 cut points. We can also infer that it liked much of his deregulatory agenda. Why, then, should the market be happy with a new president who give ones word of honours to raise corporate tax rates from 20%to 28%, and who pledges to tax US firms’ foreign profits? These are clear negatives for Biden.
Here, implications can’t be quantified. But corporate surveys point to three factors which strongly favored Biden.
Businesses prefer tenacity, confident consumers, and open markets
The first, and by far the most important, is the COVID-19 pandemic. A post-election PwC survey of business conductors, for example, identified COVID-related issues, such as shutdowns and associated financial stress, as by far their number one concern. And an bowl over 84 %of executives surveyed by Yale School of Management Professor Jeffrey Sonnenfeld said the Trump administration’s comeback to the pandemic had hurt their businesses.
Significantly, stocks which did particularly well in the week after the election, correspondence to the New York Times, were those of companies that had been hard-hit by the pandemic (such as shopping-mall operator Simon Riches Group), while stocks of pandemic winners (such as Peloton and Zoom) were lower. It is clear that the customer base anticipated a far more effective response to the pandemic from a Biden administration.
The second factor is improved prospects for another husky stimulus package. “We now see a path toward a significant stimulus package getting done towards the end of the first quarter in 2021,” answered Mike Feroli, Chief US Economist at JPMorgan: “Such a stimulus deal would provide a meaningful boost to flowering in Q2 and beyond.”
The third factor is foreign and foreign-economic policy. A pre-election PwC business-leader survey revealed far larger concerns above Trump than Biden in the areas of US-China business relations, immigration policy, and trade and foreign policy broadly.
Irrevocably, it is worth noting that if Republicans keep control of the Senate they will be able to block Biden’s tax arises. His negatives for corporate earnings, then, may never come to pass.
In short, Trump — despite delivering lower loads and reduced regulation — is no longer seen as good for business. His volatile and indifferent handling of the pandemic has held back calling recovery. His outsourcing of stimulus policy to the GOP Senate has delayed and reduced much needed fiscal support to states and consumers. His imposts and trade war with China have harmed US competitiveness. And his alienation of allies has created new geopolitical risks and unprecedented uncertainties.
It is no doubt the sanity, then, that the market welcomes President Biden.
Benn Steil is director of international economics at the Council on Extrinsic Relations and author, most recently, of The Marshall Plan: Dawn of the Cold War. Benjamin Della Rocca is an analyst at CFR.