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Avery Shenfeld, chief economist at CIBC
There are really two periods in terms of thinking about what this upcoming U.S. election will mean for financial markets and more broadly for the economy. First, we of course have the period between now and the inauguration of a new president or the existing president in January. And the issues there surround the concerns that markets have about the uncertainty of the actual election process, including the potential that the election results are disputed, that particularly the mail-in ballots are called into question, that this ends up being litigated, and in the extreme, even the risk that this ends up with violence in the streets, as voters on either side react to disappointments and how that result is going. That’s something that we haven’t seen in past elections. It’s certainly a potential source of financial market volatility until we know who’s the president of the United States.
But more importantly for investors with a longer horizon, we’re looking at the implications of the election itself. Should Joe Biden become president, and, importantly, should that also carry through to a Democratic win in the Senate — because both levels of government there are quite important — there could be some significant impacts on particular sectors of the equity market. Most notably, Biden has a plan to raise corporate income taxes, which in general would be seen as a negative for the equity market, although one that may now be largely priced in. But remember that some of the funds raised from that tax increase as well as potential tax increases on upper income Americans that reverse some of what Trump delivered could end up being spent in the economy by the government or transferred to lower-income Americans who will spend it, creating demand and opportunity in some sectors of the equity market.
In terms of other policies, the largest distinction is on climate change and the environment where a Biden administration promises to bring in much tougher measures to arrest climate change. Longer term, that may well be a positive for the fate of the U.S. economy and indeed the global economy, but in the near term, there’s clearly some winners and losers. It does create a tougher climate for the U.S. energy sector. For Canada’s energy stocks, it’s a mixed message. It will put U.S. energy companies on a level playing field with Canadian companies that are already dealing with those sorts of similar regulatory changes. But at the same time, we know that Biden’s an opponent to the Keystone pipeline and will be taking a tougher line to make sure that countries like Canada live up to their share of the bargain in terms of climate change.
One area of opportunity of course, is the alternative energy sector. In order to meet these goals, we’re going to need more electric vehicles. We might need to look at hydrogen as a source of fuel for larger vehicles. And there’s generally some opportunities, we believe, in that sector that will increase under a Biden administration.
If Trump should win, of course you might think it’s business as usual. We might see, for example, again, a return to a more volatile environment on the trade front. We do have a trade agreement between Canada and the U.S., but remember that hasn’t stopped the White House from imposing tariffs on our aluminum sector. We could see things like that arise again.
Trump will give more of a green light to the U.S. energy sector. And of course, will retain the lower tax rates that do pose a competitive challenge for Canada. Our tax rates are similar, but it means still that it’s a tougher climate for Canadian investors to attract new corporate investment into our country given the low-tax environment that prevails in the U.S.
Either way, certainly the election will have implications across a broad range of sectors and, therefore, certainly worth watching from now until the day where we find out who’s actually won.