Investors are increasingly gearing up for a Biden presidency
and the market-moving policies that will come with it.
Among the most consequential are higher tax rates on capital
gains. While some fear such actions will impede the market's upward trajectory,
Goldman Sachs strategists said Friday that a tax hike is "only a minor
speed bump" for the rally.
Democratic presidential nominee Joe Biden has floated a plan
for effectively doubling the capital gains tax to 43.4% from 23.8% for
Americans with more than $1 million in income. Dividend income would also be
affected by the hike.
The wealthiest Americans were the biggest stock sellers
following the last capital-gains tax hike in 2013, suggesting the market could
face near-term pressure under a similar policy move. Yet Goldman's team expects
the trend to be only temporary and still give way to steady returns throughout
next year.
"History shows stock prices fall, equity allocations
decline, and momentum underperforms ahead of increases in the capital gains tax
rate," the team led by David Kostin wrote in a note to clients.
"However, any potential equity selling will be short-lived and reversed in
subsequent quarters."
Much of wealthy Americans' selling will be offset by demand
elsewhere in the market, according to the bank. Goldman expects households'
equity allocations to rise in 2021 whether Biden wins or not, with much of the
demand coming from moves away from cash. Curiously, the wealthiest 1% of
households will lead the charge, despite having the most to lose from Biden's
proposed tax hike.
Foreign investors and corporations will also be net buyers
of US stocks, Goldman said. A weakening US dollar and rebound in buyback
activity will lift the market, though corporate demand for stocks will remain
well below pre-pandemic levels through 2021.
Mutual and pension funds will be net sellers of stocks in
the coming year, the strategists added. A continued shift to passive management
from active management will drive inflows to exchange-traded funds and stock
selling at mutual funds. Pension funds will dump stocks as Treasury yields tick
higher, the bank added.
The S&P 500 is slated to rise roughly 10% by the middle
of 2021 regardless of the election's outcome, the strategists said.
Democrat-driven tax policy presents a near-term risk to the market's climb, but
robust demand for US stocks can offset selling should a Biden presidency lift
the capital gains tax early in its first term. Boosted fiscal spending under a
Democrat-led government can also provide some upside, Goldman said, as the
economic recovery has slowed in recent months without fresh stimulus.
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