• Saahil Menon

Markets in 2020: What Can We Expect?

The Effect of a New President on Finance and Investments

In an economy filled with billionaires and political giants, very few people attain the resources to individually influence financial markets. The Commander-in-Chief tends to hold the largest piece of this pie, and this is precisely why the outcome of the Presidential election could profoundly impact stocks in 2020.

Depending upon who takes the reigns next, we could be experiencing a vast change in the fiery markets of 2019: stocks could completely plummet or, on the contrary, we may see a continual rise in the performance of key indicators.

Without further ado, let’s aim to deduce how some of the most popular candidates will impact the financial markets and our investments.

1. Senator Elizabeth Warren

“If Elizabeth Warren is elected, the S&P would trade around $2,250”

Paul Tudor Jones – one of the most successful traders of all time – said the above at the Greenwich Economic Forum last week. According to him, we’re looking at a 25% drop in the market if Senator Warren succeeds, given the fact that the S&P500 (an index that represents the market as a whole) currently sits around the $3,200 mark. It’s no secret that Senator Warren holds a history of harshness against the finance industry, but economically, why does billionaire PTJ predict such a significant drop?

a) Warren’s Wealth Tax Bill

Source: (iMoney, 2019)

Senator Warren has proposed an additional 2% tax on the net income of people with total assets of $50 million to $1 billion, along with a 3% tax on individuals with asset values north of the aforementioned figures. While these statistics suggest that the wealthy will lose a bit of money, they are not detrimentally impactful towards the income of billionaires; and in fact, many of these wealthy people take no issue with a greater proportion of their money going towards better infrastructure and education.

However, Tudor Jones believes that the marginal drop in the net worth of wealthy people will hinder the quantity of investments that rich people make, and because of the magnitude of these billionaire investment accounts, any drop in their confidence is likely to impact the financial markets as a whole. In layman’s terms: if the rich invest less, the economy as a whole invests less, and therefore, we see less economic growth.

While PTJ may be right, it’s also worth considering that Warren’s policies and objectives are not that different from President Obama’s objectives; and likewise, people initially feared his impact on the stock market. However, his term sustained one of the best stock market performances in history, with the S&P500 and DJ30 indexes (representations of the market as a whole) both growing over 100%.

Hence, while Trump’s administration has certainly succeeded with the financial markets, Warren’s presidency may not be as bad as the investment community forecasts.

2. Former Vice President Joe Biden

While the investing community shivers at the thought of Warren winning the Presidency, over 40% of senior financiers see a somewhat positive stock market under Joe Biden, with a maximum downfall of 10% in the S&P500 Index. This is because his policies stem away from targeting the finance industry, and therefore imply that investor/business confidence will retain their current levels; and only healthcare stocks may take a hit, given Biden’s rigorous approach towards the aforementioned industry.

Figure 1: Biden's Lead as the Democratic Nominee:

Source: (Statista, 2019)

Given the fact that Biden is holding a somewhat significant lead, investors can be slightly relieved as his presidency - should he win - will not rock the markets to the level where investment growth and potential for profit is hindered.

3. Current President Donald Trump

The counter to the previous nominees would be a Re-election victory for Trump: and this is perhaps the most probable outcome in the 2020 Presidential Race. The question is: do we expect more market volatility, or less?

Given the fact that Trump escalated geopolitical warfare within the first 3 days of 2020, it’s fair to say that we can expect some market turbulence within the coming few months. The Phase 2 talks with China, negotiations with Iran, as well as his continued battering with the Federal Reserve will easily move the financial markets, which is why investors should prepare to hover through another year of volatile – yet potentially rewarding – financial markets. For beginner investors, what are some well-known measures to counteract market volatility?

  • Keep cash in reserve: you don’t want to be cashless when there’s opportunity to buy cheaply (I.e. if the markets crash).

  • Hold some Gold: this commodity has been rallying quite well over the course of 2019, and may sustain its demand due to the devaluation of currencies and volatility of markets.

  • Look at investments outside the US: Although the US is perhaps the world’s foremost economy, not all countries will follow its market behavior. Hence, if the US markets crash, then investing in foreign companies may prove a good bet in the short term.

Overall Sentiment:

Although we’ve deduced the potential outcomes of 3 key people in the presidential race, it’s important to consider the critical point of an impending recession.

The year of 2019 saw more loquaciousness surrounding a recession than ever before: from the biggest news channels to the smartest financiers, many feel that an economic recession is on the rise.

This is important because a recession could offset some of our previous predictions, as no matter who is president, the stock markets will see a huge plummeting in that period.

Figure 2: Financier Predictions on Timing of Recession

Source: (The Wall Street Journal, 2019)

As depicted above, around 35% of people in the finance industry believe that the recession will occur this year, which makes it an extremely undecided and difficult year to assess in terms of the financial markets. We’ve got a Trump reelection, positive Sino-US trade talks, and reduced geopolitical warfare: all of which could swing the markets upwards, while at the same time, the fear of recession and poor political relations could wreak havoc in ways we may not be prepared for.

In conclusion, what does this all mean for us retail investors?

The overall uncertainty suggests that we should perhaps diversify our risk and utilize the momentum of the market: if the key indexes are showing strength and investors hold high confidence, we can expect a solid first few months, and invest based on this. However, if markets begin to experience volatility and poor global relations, we should certainly be weary and prepared with cash reserves: ready to feast on the remains of any market downfall.