Yes A checkmark with a circle around it close Wells Fargo Advisors on Facebook Facebook symbol, links to WFA Facebook page Wells Fargo Advisors on Linkedin Linkedin symbol, links to WFA Linkedin page

Market Commentary

Weekly commentary providing analysis with an outlook for the equity market.

October 21, 2020

Scott Wren, Senior Global Equity Strategist

Immediate gratification

Key takeaways

  • The stock market doesn’t appear to be concerned about the potential for higher taxes and more regulation should former Vice President Biden win the election.
  • Investors appear to be more focused on the near term possibility that a large stimulus package will get through Congress no matter who is elected President.

Download the report (PDF)

The S&P 500 has largely been on an upward trend in recent months, notching new record highs in early September, with only a few pullbacks along the way. With the election less than two weeks away and former Vice President Joe Biden ahead in most of the polls, many investors are wondering how this equity uptrend can still be intact given the proposed tax and regulation changes his potential administration would attempt to enact. Increased taxes for corporations and upper-income individuals as well as more regulation for certain industries like energy are part of this candidate’s stated plans should he win the presidency and be able to get Congress to agree and pass legislation. Many pundits would argue that higher taxes and more regulation are negatives for the economy and stock market. So what gives?

We have argued for quite some time the equity market was assuming that additional positive medical news (vaccines and treatments) were likely in the nearer term, the Federal Reserve (Fed) would keep interest rates very low for an extended period of time, and Congress would provide large amounts of fiscal stimulus to the economy. So far, so good as promising medical news continues and Fed Chair Jay Powell has reinforced the message that low rates are here to stay for the foreseeable future. Congress has also provided a large amount of fiscal stimulus. We continue to believe that positive medical developments will continue and Congress will approve additional stimulus, but the ultimate timing of either is uncertain.

As far as additional stimulus is concerned, the administration has so far proposed dollar amounts that have been well below that sought by House Democrats ($1.8 trillion vs. $3+ trillion).1 In either case, the amounts discussed and proposed are huge. Equity markets are coming to grips with the prospects that the magnitude of stimulus is likely going to be significant whether we continue with divided government or we have a new president and a single-party sweep. That is a major key to understanding why the stock market has continued to hover largely within a few percentage points of record levels despite the fact that Vice President Biden is leading in the polls even though he is proposing to hike taxes and increase regulation.

At least for the time being, the stock market is seeking immediate gratification in the form of a very large stimulus package and not paying much attention to how higher taxes and more regulation might impact the economy or longer-term issues like rising government debt. That will likely continue to be the case in the nearer term.

1 Bloomberg, October 20, 2020.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.