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The US election and the stock market

Although the likelihood of a Bernie Sanders presidency remains low, the impact on corporate America and its stock market would be significant.

Although the likelihood of a Bernie Sanders presidency remains low, the impact on corporate America and its stock market would be significant.

by
John Redwood

in Features

05.03.2020

Over the last week, there has been some clarification in the Democratic contest to find a Presidential candidate. The front runner, Bernie Sanders, continued to poll well – though not as well as some anticipated.

He did not achieve a knock-out set of results in the 14 states with primary elections on Tuesday. Joe Biden, the original front runner who did badly in early contests suddenly emerged victorious from South Carolina with some momentum. Two of his more-moderate rivals for the crown decided to pull out and back him, leaving him to fight it out with Michael Bloomberg.

In the Tuesday elections, Mr Biden polled well in most places, capturing a majority of the states on offer. Mr Bloomberg received around 15% of the vote. He decided this was not a good enough return on the huge sums he had spent on adverts, and so he abandoned his quest for the White House too. It looks likely now that Mr Biden will be the preferred moderate. It is also likely that the battle between him and Mr Sanders will continue down to the Democratic Convention, where the final decision is made, as both front runners look well dug in and have considerable support.

The stock market seems to assume Donald Trump will secure re-election, or failing that a more moderate Democrat candidate will win. The market does not look as if it has discounted the third, less likely outcome, a Sanders Presidency.

Bernie Sanders targets business

Mr Sanders is altogether much more socialist and radical than Democrat candidates have traditionally been. He proposes a huge programme of state intervention and higher taxes to pay for it. He wishes to declare war on rich people and many large corporations. His language is unusually tough, revealing strong hatred for billionaires and for parts of corporate America. His take on the oil, gas and coal industries is they “have evaded taxes, desecrated tribal lands, exploited workers and poisoned communities”.

Mr Sanders’ biggest passion is to launch a full-throated version of the green revolution in the US. He proceeds from the proposition that this is a climate-change emergency. He blames the fossil fuel industry for the problems and vows to “end the greed of the fossil fuel industry and hold them accountable”. He wishes “to face down the greed of the fossil fuel executives and billionaire class who stand in the way of climate action”. His policy includes “making the industry pay for its pollution and prosecuting it for the damage it has caused”.

The plan for radical change includes banning fracking, banning the export and imports of fossil fuels, diverting federal pension funds from fossil fuel investment, placing a fee on all goods with imported carbon pollution and ending all new fossil fuel production immediately. As his website states: “He will not leave it to the market to determine the fate of the planet.”

Mr Sanders wishes to ensure state generation of power which will be 100% from renewable sources. He wants to end all fossil fuel use in buildings by 2030 and push hard to switch over to all-electric vehicles. The total green deal is estimated by him to cost $16.3 trillion to make all the investments in conversion to all-electric heating and transport.

Refining health

He also wishes to undertake a huge reform of the US healthcare system, with free Medicare for all. This would entail an NHS for all Americans which would include dental and optical services and long-term care. Drug prices would be halved for prescription medicines and drug company prices would be negotiated down by the new national health system. He would raise welfare payments to the lower income pensioners and disabled by $1,300 a year. He wishes to cancel college debts and introduce a universal childcare service. Workers losing their jobs in fossil fuels would have a guaranteed five years’ salary along with state help to get them jobs in the new green industries.

So how would he pay for all this? He plans a huge increase in taxes on the rich and on companies. He singles out the fossil fuel industry, proposing “massively raising taxes on corporate polluters and investors in fossil fuel”, but wants to put corporation tax generally up to 35%. There would be a 7.5% payroll tax to pay for the medical plans, along with a 4% individual employee levy. There would be a wealth tax of between 1% and 8% depending on levels of wealth. The highest earners would pay more in social security charges. The top rate of income tax would be hiked to 52%, and capital gains would be taxed at income tax rates. There would also be higher taxes on transferring wealth on death.

It is safe to say that all this is not discounted by the US equity market. Shares generally would fall in value on confirmation of considerably higher taxes, whilst individual sectors such as pharmaceuticals and utilities would fall on much more state intervention hitting their prices and turnover. All fossil fuel companies would be particularly exposed to bad news.

We think the probability of both Mr Sanders winning the nomination and going on to win the Presidency is low, but it cannot entirely be ruled out.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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