ElectionWatch · resulting tax hikes will be averted. Absent addi-tional congressional action, the...

ElectionWatchInvestment implications of the 2020 US elections

23 September 2020Chief Investment Office GWMInvestment Research

Supreme

Court vacancy

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Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Pandemic politics

A global pandemic and a subsequent economic re-cession have profoundly altered the national politi-cal landscape. The novel coronavirus has prevented the two candidates from engaging voters in a con-ventional campaign. Both President Donald Trump and former Vice President Joe Biden have been obliged to rely more often on social media and designated surrogates to promote their candida-cies. And both individuals have been forced to con-front the consequences of a public health emer-gency. The death of Justice Ruth Bader Ginsburg was another unexpected development, thrusting the Supreme Court into the political fray in the fi-nal weeks of the campaign.

President Trump abandoned his initial campaign strategy of focusing on the health of the US econ-omy in favor of promoting public safety in an era of social unrest and competition with China. Biden has reiterated his criticism of the president’s initial

response to the coronavirus while playing defense against critics who argue that his platform will hin-der an economic recovery.

Biden’s lead over the president in national polls has been remarkably steady, but, as we learned four years ago, polls can be deceiving. The president’s biggest adversary may now be the calendar (see Fig. 1 on the next page). With six weeks until Elec-tion Day, voters are already casting their ballots. Residents of North Carolina began doing so by mail last week. Other states will commence in-per-son voting before the end of the month.

Our colleagues in the UBS US Office of Public Policy believe a Blue Wave, in which Democrats capture the White House and both houses of Congress, is the most likely outcome. However, the odds of that happening are only marginally higher than President Trump winning reelection with a divided Congress.

This report has been prepared by UBS Financial Services Inc. Please see important disclaimers and disclosures that begin on page 21.

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Pandemic politics

US economy

Equities

Fixed income

Communication services

Consumer discretionary

Consumer staples

Energy

Healthcare

Industrials

Information technology

Materials

Midstream / MLPs

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Renewable energy

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Treasuries and agencies

Corporate credit

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Interview

Introduction

Investment ideas

Scenario analysis

Fiscal policies

The 2020 countdownFigure 1

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This report was published on 23 September The second presidential debate is 22 days away

The third presidential debate is 29 days away

Election Day is 41 days away

The first presidential debate is 6 days away

The vice presidential debate is 14 days away

Competing fiscal policies

The enhanced unemployment benefits from the CARES Act of USD 600 per week expired on 31 July. We had expected political pressure to compel Congress to reach a compromise to provide an-other round of fiscal stimulus before Election Day. Those pleas for additional aid thus far have gone unanswered, overshadowed by the legislative grid-lock that often accompanies the final weeks of a presidential election campaign. While a bipartisan group of lawmakers has introduced a bill to appro-priate funds for another round of fiscal stimulus, leadership on both sides of the aisle appear reluc-tant to proceed. The next best opportunity for more federal aid may be the lame-duck session of Congress when it convenes in December.

The failure of Congress to act only highlights the degree to which the two political parties have widely divergent world views. COVID-19 will over-shadow other substantive policy areas in the run-up to 3 November, but the two candidates’ fiscal policies are finally receiving the attention they de-serve from voters and investors. When the cam-paign jargon and contentious rhetoric are put aside, the two candidates offer voters clear and unambig-uously different perspectives on the policies neces-sary to promote economic growth and security.

A study in contrasts

President Trump abandoned the usual practice of endorsing a lengthy campaign policy platform in conjunction with the GOP national nominating con-vention. Instead, he released an abbreviated written agenda for a planned second term in office. The GOP policy statement is largely aspirational, with fewer details than one is accustomed to seeing from a presidential candidate. The president’s pro-posed fiscal policies include additional tax cuts for individuals and federal tax credits and deductions for corporations that repatriate jobs to the US from overseas locations. The statement also explicitly supports additional capital gains tax relief through an expansion of the Opportunity Zone program.

Solita MarcelliChief Investment Officer Americas

Tom McLoughlinHead of Fixed Income Americas

David LefkowitzHead of Equities Americas

https://www.ubs.com/electionwatch


Pandemic politics

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Consumer staples

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Interview

Fun fact: In the early days of the Republic, citizens would cast their votes on the courthouse steps, out loud and in public. Paper ballots, cast in secret, were a later innovation.

Numerous provisions from the Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025, but the president does not discuss how the resulting tax hikes will be averted. Absent addi-tional congressional action, the individual income tax cuts, an increase in the standard deduction, and the expanded child tax credit will all revert to prior levels in just over five years. Voters are left to assume that the president will be able convince Congress to make the tax cuts permanent.

The policy statement, which was released in con-junction with his acceptance speech, also focuses on the adoption of a more adversarial posture to-ward China, strict enforcement of immigration laws, and support for law enforcement personnel. While all three are viewed by the GOP as winning campaign strategies, the reference to “ending our reliance on China” suggests that the president is

willing to continue to use tariffs as a tool of for-eign policy if elected to a second term. He has threatened to selectively impose tariffs upon, and to strip government contracts from, companies that refuse to relocate their operations to the US.

Meanwhile, in a rare instance of tacit agreement with his challenger, the president reaffirmed a de-sire to cut prescription drug prices, lower health-care insurance premiums, and require coverage of

What happens if the election results are too close to call?

There is another source of market volatility in November that is worth a brief mention here. As we discussed in ElectionBrief, “A contested election,” a close contest may re-sult in a delay in the announcement of a winner. To the extent that absentee ballots are challenged in states where the outcome is too close to call, the ensuing litigation may take some time to resolve. The equity market appears to be girding itself for po-tential volatility in November, as the chart

below illustrates. In that event, uncertainty alone could trigger equity market volatility as investors adopt a risk-off strategy. We would expect gold and US government se-curities to appreciate in value, but the ad-verse impact of a contested election would be transitory. Biden currently leads in many battleground states (see Fig. 3 on the next page). Trump’s path to a second term runs through Florida, without which he is un-likely to win.

Equity markets likely to remain volatile around the election

Source: Bloomberg, UBS, as of 21 September 2020

Figure 2

VIX futures curve

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Introduction

Investment ideas

Scenario analysis

Fiscal policies


https://www.ubs.com/global/en/wealth-management/chief-investment-office/market-insights/regional-outlook/us-elections/2020/investment-implications-of-delayed-voting-results.html

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Pandemic politics

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all preexisting conditions. On the whole, the im-pact of the president’s policies on Treasury receipts (and on the US economy generally) is difficult to calculate. Whether or not this is purposeful is de-batable, but the inevitable conclusion is that a sec-ond Trump administration would be similar to the first and forced to rely on deficit financing to ac-complish its goals.

In contrast to the president’s abridged policy state-ment, the Democratic Party platform is a pro-tracted recitation of policies as disparate as the need for federal bankruptcy reform, a Green New Deal, and reinvestment in rural America. The Biden campaign has not released a consolidated fiscal plan but instead weaved his call for higher taxes to partially fund a series of spending proposals re-lated to infrastructure investment, climate change, and an expansion of healthcare coverage. At its core, however, the Biden campaign is focused on strengthening the federal regulatory regime, re-versing many of the provisions of the Tax Cuts and Jobs Act, and increasing federal funding of long-time Democratic policy priorities.

The former vice president advocates an increase in the highest marginal tax rate to 39.6%, and higher payroll taxes for individuals earning more than USD 400,000 a year. He also proposes to tax capital gains at the same rate as ordinary income for tax-

payers earning more than USD 1 million. The cor-porate tax rate is targeted for an increase, albeit less than the rate prevalent before the enactment of the Tax Cuts and Jobs Act. The corporate tax rate would increase from 21% to 28%, and an al-ternative minimum tax of 15% would be levied on companies that report more than USD 100 million in book income.

The Democratic campaign platform also takes aim at the estate tax by recommending a reduction in the exemption to USD 3.5 million and the elimina-tion of the stepped-up basis rule. Tax preferences for the fossil fuel industry would be eliminated, while those for energy efficiency would be in-creased. With the exception of the payroll tax in-crease, most of Biden’s fiscal policy platform could be implemented with a majority vote in the Senate through budget reconciliation.

The Tax Policy Center has estimated that Biden’s tax proposals would increase federal revenue by about USD 4 trillion between 2021 and 2030, or 1.5% of GDP over a decade.1 Roughly half of the revenue gain would be derived from higher taxes on US households, with the remainder coming from busi-nesses and corporations. The Tax Foundation ex-pects the Biden tax plan to reduce after-tax income for the top 1% of taxpayers by 7.8%. The top 5% would see their after-tax income drop by 1.1%, with diminishing reductions thereafter as income declines. An abbreviated summary of the Biden fis-cal plan is illustrated in Fig. 4 on the next page.

1Gordon B. Mermin, Surachai Khitatrakun, Chenxi Lu, Thornton Matheson, and Jeffrey Rohaly, “An Analysis of Former Vice President Biden’s Tax Proposals,” Tax Policy Cen-ter, Urban Institute and Brooking Institution, 5 March 2020. The Tax Foundation estimates the revenue gain at USD 3.8 trillion. Dynamic scoring, based on an assumption that economic growth would slow, suggests a revenue gain of USD 3.2 trillion.

The Tax Policy Center has estimated that Biden’s tax proposals would increase federal revenue by about USD 4 trillion between 2021 and 2030.

Figure 3

2020 battleground states Trump is trailing in several states he won in 2016

State Trump Biden Trump vs. Clinton in

2016

Trump vs. Biden in

2020

Wisconsin 43.4% 50.1% +0.7 -6.7

Florida 47.0% 48.6% +1.2 -1.6

Michigan 43.0% 47.8% +0.3 -4.8

Pennsylvania 44.7% 48.7% +0.7 -4.0

North Carolina 46.6% 47.5% +3.7 -0.9

Arizona 44.2% 49.2% +3.5 -5.0

Iowa 46.7% 45.0% +9.5 +1.7

Ohio 44.3% 46.7% +8.1 -2.4

Texas 47.3% 45.0% +9.0 +2.3

Georgia 46.3% 45.0% +5.1 +1.3

New Hampshire 42.5% 48.0% -0.3 -5.5

Nevada 40.5% 46.5% -2.4 -6.0

Source: RealClearPolitics, UBS, as of 21 September 2020

Stark differences

The disparity in the two candidates’ fiscal policy platforms is rather straightforward. Absent any de-tails to the contrary, we are obliged to conclude that President Trump would rely on deficit financ-ing to reduce tax rates while simultaneously in-creasing federal investment in the nation’s physical

Introduction

Investment ideas

Scenario analysis

Fiscal policies



Pandemic politics

US economy

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infrastructure. Biden proposes to reverse the tax cuts enacted in 2017 and redirect the resulting proceeds toward combatting climate change and expanding healthcare coverage.

However, the size and scope of fiscal stimulus planned by a Biden administration are also much

Figure 4

Biden 2020 tax planCurrent tax law vs. proposed plan

Current law Biden proposed plan

Individual rates

• Seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37% applicable to tax years beginning after 31 December 2017 and before 1 January 2026

• Payroll tax cap is currently USD 137,700, with the FICA tax at 12.4% split between the employer and employee

• Top rate increases to 39.6%. Taxpayers making more than USD 400,000 would see taxes increase

• Lift the social security taxable wage base cap on earners over USD 400,000

Capital gains rates and investments

• Top rate is 20%• For households earning over USD 250,000 for joint

filers and USD 200,000 for other taxpayers, net investment income tax adds 3.8% rate

• Taxpayers in the 10% and 12% tax brackets pay 0%• Taxpayers between 12% and top rate pay 15%

• Taxpayers with over USD 1 million income taxed at top ordinary income rate (39.6%)

Credits and deductions

• Allowed to take eligible deductions and credits against income tax liability

• Itemized deduction for state and local taxes (SALT) is capped at USD 10,000

• Cap itemized deductions at 28%• Restore PEASE for incomes above USD 400,000• End SALT cap

Carried interest • Taxed at lower capital gains rates• Certain service-based partnership interests have

three-year holding period requirement for long-term capital gains and losses

• Potential ordinary income treatment for all carried interest

GILTI (international business tax)

• US taxpayers that own interests in certain foreign corporations are subject to US tax on foreign income earned by the foreign corporation at a minimum rate of 10.5%

• Raise minimum rate to 21%

Estate taxes • Exemption amount of USD 11.58 million (for 2020; however, this exemption amount reverts back to USD 5 million after 2025)

• Assets passed through at death get a basis step-up to fair market value (FMV) for the recipient

• Reduce exemption amount possibly as low as USD 3.5 million, possibly retroactive to 1 January 2021

• Possible increase in estate tax rate (currently 40%)• Eliminate stepped-up basis rule

Corporate tax rate

• 21% • 28%• Minimum book tax of 15% on certain companies

reporting more than USD 100 million book income in the US, if such companies paid zero or negative federal income taxes

• Credit for foreign taxes paid and carryovers allowed

Depreciation • Depreciation deduction available for taxpayers as a mechanism to recover the capital invested in an asset

• Eligible property can be entirely expensed in the first year placed in service

• Reverse 2017 TCJA provisions that overwhelmingly benefit corporations

Qualified business income deduction

• Taxpayers other than C corporations generally allowed to deduct:• 20% of qualified business income (QBI) from a

partnership, S corporation, or sole proprietorship• 20% of qualified REIT dividends and qualified

publicly traded partnership income

• Limit deduction to taxpayers making USD 400,000 or less

• End special qualifying rules, including those for real estate investors

Real estate • If real property is exchanged for that of “like-kind,” taxes on gains are deferred

• Potential revision to “like-kind” exchange rules

Source: Trump, Biden Tax Plan Comparison (Bloomberg Tax & Accounting Report, 2020)

larger than the ones contemplated by the presi-dent. The net result is to neutralize some of the adverse effects of tax increases on the rate of eco-nomic growth. In either instance, whether the president is reelected or voters choose the former vice president, the size of the federal deficit is des-tined to remain large.

Introduction

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US economy

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Investment implications

When thinking about the potential macroeconomic impact of fiscal policy changes, it’s important to keep the current environment in mind. At the mo-ment, economic activity is far below normal, and there is significant slack in the labor market. Many businesses and individuals have lost income and are struggling to service their debts. Against that backdrop, another round of fiscal stimulus is likely to be more effective than if economic conditions were stronger. The risk of “crowding out” private capital, where higher government spending causes interest rates to rise and private-sector spending to fall, is not a concern in the near term.

In some ways, the circumstances today are similar to those prevailing in 2009 at the depth of the global financial crisis. At that time, the Congressio-nal Budget Office produced estimates for the mul-tiplier effect of different policies that were then under consideration (Fig. 5).

The wide range of estimates for each category is a testament to the difficulty of predicting the eco-nomic impact of policy changes. However, it is worth noting that many of Biden’s proposed spending increases appear near the top of the ac-companying table, while his proposed tax hikes are near the bottom. For every dollar in revenue raised through tax hikes, we would expect at least a dol-lar in spending, and the net result should be incre-mentally positive for growth.

It is more difficult to estimate the impact of Presi-dent Trump’s policies. He would likely face a di-vided Congress, so his fiscal priorities would not be enacted without broader bipartisan support. As with Biden, infrastructure spending is a potential positive development if a deal can be reached. De-regulation does not fit neatly into this framework; the initiatives undertaken in his first term were likely very positive but not easily replicated in a sec-ond term. Barring the implementation of new tar-iffs, US trade policy is not expected to have as large a macroeconomic impact in a second term.

What should investors do?

There is an old saying that “forewarned is fore-armed.” In the event that Joe Biden is elected and control of the Senate reverts to the Democratic Party—the most probable scenario, according to our colleagues in the UBS US Office of Public Pol-icy (see Fig. 6 on the next page)—personal in-come taxes are expected to rise. Please refer to

As with Biden, infrastructure spending under a Trump administration is a potential positive development if a deal can be reached.

Figure 5

Ranges for US fiscal multipliers

Estimated multipliers

Type of activity Low estimate High estimate

Purchases of goods and services by the federal government 0.5 2.5

Transfer payments to state and local governments for infrastructure 0.4 2.2

Transfer payments to state and local governments for other purposes 0.4 1.8

Transfer payments to individuals 0.4 2.1

One-time payments to retirees 0.2 1

Two-year tax cuts for lower- and middle-income people 0.3 1.5

One-year tax cut for higher-income people 0.1 0.6

Extension of first-time homebuyer credit 0.2 0.8

Corporate tax provisions primarily affecting cash flow 0 0.4

Source: Congressional Budget Office (CBO), UBS, as of 16 September 2020

Note: The fiscal multiplier is a ratio measuring how a change in government spending or a change in taxes will affect national income, as measured by the gross domestic product.

Introduction

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Scenario analysis

Fiscal policies



Pandemic politics

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UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Financial Services Inc. and our Financial Advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different timeframes. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment.

page 18 for a discussion of the steps individual in-vestors can take to prepare for a potential change in administration.

We are also obliged to remind investors to adopt a long-term view, and to avoid emotional deci-sions in the wake of any election. Although the November election looms large, it should not be the determining factor in constructing investment portfolios. Through a behavior called “negative partisanship,” it’s common to feel more negatively about the other party than you feel positive about your own. In a politically charged election year, this tendency may threaten to override the objec-tive assessment of risk and reward, dangerously skewing investment behavior.

Speak with your financial advisor about how you can position yourself to reduce the impact of poli-tics and policies on your personal financial goals. These effects are likely to be more muted than you might expect. We therefore recommend that in-vestors focus on things that are within their own control. The UBS Wealth Way approach can help to put these decisions into context.

Will we see a drawdown in equity markets if Biden is elected? It’s possible. But in that event, would

Equities usually rise aer elections

Source: Bloomberg, UBS, as of 21 September 2020

Figure 7

S&P 500 performance in the six months aer presidential electionssince 1960, excluding recessions

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1964 1976 1988 2004 Average

1968 1980 1992 2012

1972 1984 1996 2016

Elec

tion

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equity markets recover? We believe they would. The fiscal stimulus envisioned by the former vice president is significant and will resonate over time. And, as the accompanying chart illustrates, equity market drawdowns in the wake of US elections tend to be short-lived, and the decline in values rarely exceed 5% (Fig. 7).

Figure 6

Scenario probabilities from the UBS US Office of Public Policy

Blue Wave DDD

50% probability

Biden Divided Congress

10% probability

Trump Status quo

35% probability

Red Wave RRR

5% probability

Democrats ride Biden’s coat-tails to a narrow majority in the US Senate. A tax bill is enacted through budget rec-onciliation. The maximum marginal rate is raised to 39.6%. The corporate tax rate is raised to 28%, and an alternative minimum tax on book income is levied at 15%. Capital gains taxed at higher rates at higher income levels.

A less likely scenario where Biden wins but Democrats fail to assume control of the Senate. GOP retains control but its majority shrinks fur-ther. Biden implements poli-cies through regulation. Taxes remain unchanged. Expiring provisions of Tax Cuts and Jobs Act unaddressed.

Limited progress on legisla-tion. Federal government provides modest amount of fiscal stimulus in final round of relief. Policy through regu-lation prevails. Tensions with China escalate.

An unlikely outcome, as Democrats are expected to retain control of the House of Representatives. However, if the scenario occurs, expiring provisions of the Tax Cuts and Jobs Act would be made per-manent. Defense Department budget would be increased.

50% 10% 35% 5%

Introduction

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Rather than making a wholesale change to your portfolio, one of the best steps you can take is to make sure you have a Liquidity strategy set aside in cash and high-quality bonds to meet the next three to five years of expenses. If, for unforeseen reasons, the election results in an extended bear market, your Liquidity strategy can be spent down, providing you with the funds that you need to live regardless of short-term market fluctuations and allowing ample time for the risk assets in the rest of your portfolio time to recover.

For investors simply looking to avoid volatility in advance of the election, we updated our “Cam-paign Warriors” stock list on 10 September.

For other investors—those seeking to make tacti-cal adjustments in advance of the election—we describe the two most probable outcomes below. But first, an important note: In the asset class framework set forth on the following pages, we do our best to summarize the market implications of the four most likely scenarios over the course of one year following the election. The time frame is critically important for two reasons. First, the in-vestment community’s initial reaction may well constitute a temporary phenomenon. Second, the impact will take some time to play out as legisla-tion is crafted and the effect of additional fiscal stimulus is felt in the broader economy.

Blue Wave

The potential for a Blue Wave outcome is on the minds of many investors, who quite naturally won-der whether the prospect of higher taxes will trig-ger an equity market correction. We readily ac-knowledge the risk but stress that higher taxes should not be viewed in isolation. Biden’s tax pro-posals are a means of paying for some portion of his spending initiatives. As we described above, the Biden proposals in aggregate should boost economic growth, despite higher taxes for the wealthy and businesses.

In terms of sequencing, a Biden victory would likely result in a substantial amount of fiscal stimu-lus in the first quarter of 2021, which would likely precede the enactment of any tax bill, which takes a significant amount of time to wind its way

Stocks have performed well despite a higher probability of a Blue Wave

Source: Predictit.org, Bloomberg, UBS, as of 22 September 2020

Figure 9

S&P 500 performance and odds of a Biden presidency anda Democratic Congress

2,200

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Predictit odds, Biden presidency (lhs)

Predictit odds, Democratic congress (lhs)

S&P 500 level (rhs)

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Spending policies to outweigh highertaxes in a Blue Wave

Source: Biden Campaign, Cornerstone, Forbes, CRFB, Tax Policy Center, UBS,as of 17 September 2020

Figure 8

Potential fiscal impact, USD billions, in a Blue Wave scenario(Biden presidency, Democratic congressional majorities)

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Scenario analysis

Fiscal policies

through the legislative process. It’s notable that the prediction markets have been suggesting a Blue Wave as the most likely scenario since early June, and yet the S&P 500 is up 9% over this pe-riod (Fig. 9). If investors were convinced that a Blue Wave would be negative for equities, we suspect the market gains would have been more subdued over this period. Also bear in mind that the pros-pects look good that a successful vaccine could be identified by the end of the year, galvanizing the US economy ahead of any potential tax increases.

Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.



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The regulatory impact on certain sectors, such as the fossil fuel industry, would be significant. But other sectors could benefit from green initiatives, and the impact on industries with greater reliance on personal consumption would be more limited. Financials would come under closer scrutiny, but we believe the more stringent oversight would be tar-geted (e.g., a focus on consumer protections) rather than a broader rework of industry-wide regulations.

As a reminder, in our 6 July ElectionWatch report, “Preparing portfolios for November,” we high-lighted a list of stocks that we believe could be rel-ative winners in a Blue Wave scenario. In a version of this report that you can request from a UBS ad-visor, you will find our updates to that list. This basket includes companies that are leveraged to in-frastructure spending with a focus on green initia-tives, transportation infrastructure, and 5G build-outs. Within the list, we also highlight companies that are more insulated from an increase in corpo-rate taxes and those that could benefit if trade ten-sions abate. There also are companies within the healthcare space that could benefit from an expan-sion of healthcare coverage.

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Status quo

As we explained above, the next most likely out-come is a status quo election whereby President Trump wins reelection and Congress remains di-vided: a Republican Senate and Democratic House. In this scenario, we would expect a largely neutral equity market reaction based on the fact that there would be minimal policy changes. Trade fric-tions could increase, but this could be partially off-set by a small infrastructure deal. In this scenario, investors would be highly attuned to the probabil-ity and timing of additional fiscal stimulus. The

Figure 10

Investment ideas

Blue Wave DDD

50% probability*

Trump Status quo

35% probability*

Positive

Tax-exempt municipal bondsInvestor-owned utilitiesRenewable energyIndustrials and materials

Negative

Legacy energyBanking and insurancePharma and biotech

Positive

Healthcare services and managed careBanking and financialsCorporate credit

Negative

Industrials and materialsDurables and apparel

*Probabilities assigned by the UBS US Office of Public Policy.

current stalemate in stimulus negotiations high-lights the risk of divided government when the economy is weak, and further government support could be helpful.

In our 6 July report, we also published a list of companies that would benefit from a Red Wave. With the likelihood of a unified government under Republican control fading fast, we have compiled a list of companies that would benefit from the more likely status quo scenario. This list, which is available in the version of this report that you can request from a UBS advisor, features some overlap from our list of Red Wave winners, such as benefi-ciaries of a relief rally in energy, financials, and healthcare after some of the policy risks associated with a Biden victory dissipate. However, the pros-pects for a large infrastructure deal look less likely in a status quo outcome versus a Red Wave. We therefore exclude infrastructure beneficiaries from our status quo basket.


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Fixed income

Equities

US economy

Election scenario-based policy framework

Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

US macroeconomic growth outlookBrian Rose, Senior Economist Americas

Mac

roec

on

om

ic o

utl

oo

k

Modest positive

Focused on the economic recovery. Spending on stimulus, healthcare, infra-structure, and climate change more than offsets higher taxes (corporate, personal, investment). Risks: Tax increases may be gradual, but still nega-tively impact business sen-timent now, along with more regulation.

Neutral

Modest negative

Tax increases constrained by Senate, same for spend-ing initiatives, unless recov-ery still requires stimulus, then infrastructure spend-ing. Negative for growth: Regulations go up on cli-mate, energy, financials. But trade tensions and global uncertainty, espe-cially ex-China, decline.

Neutral

Deregulation continues, but more uncertainty on trade and global conflicts. Possible infrastructure spending as pure stimulus, but amount is contingent on how economy is recov-ering. Tax cuts unlikely, but so are tax increases.

Modest positive

Extension of the tax cuts in the Tax Cuts and Jobs Act more likely than addi-tional tax cuts. Potential infrastructure spending and continued deregula-tion. Risks: Additional tar-iffs on China and poten-tially other countries.

See more detail starting on page 11.

Equities summaryDavid Lefkowitz, Head of Equities Americas

Equ

itie

s

Neutral

Fiscal expansion offsets tighter regulation and higher taxes. Negative: Financials, energy. Some-what positive: Industrials, materials, utilities. Mixed: Healthcare.

Neutral

Modest negative

Increased regulation. Posi-tive: Healthcare, utilities, industrials, materials. Neg-ative: Energy, financials.

Neutral

Renewed trade war is a risk. Positive: Energy, financials, healthcare. Slight negative on trade war risks: Industrials, materials.

Neutral

Positive

Additional stimulus but renewed trade war risks. Positive: Financials, energy. Negative: Industrials.

See more detail starting on page 16.

Fixed income summaryTom McLoughlin, Head of Fixed Income Americas

Fixe

d in

com

e

Rates and inflation expec-tations rise slightly faster on fiscal stimulus. Credit spreads widen initially on fear of higher taxes but retrace on fiscal stimulus. Treasury curve steepens. Municipals rally on pros-pects for higher taxes and more federal aid to states.

Rates and inflation expec-tations unchanged. Credit spreads follow equi-ties but could widen ini-tially, with more volatility due to expectations about more stringent regulation.

Rates and inflation expec-tations unchanged. Credit spreads move with equities, gradually tighten-ing as the economy recov-ers amidst a lenient regu-latory environment.

Rates and inflation expec-tations rise slightly faster as deficit increases faster. Corporate high yield out-performs—expectations of loose regulatory environ-ment drive valuations.


Figure 11

Asset class implications under different election scenariosIn the table below, we analyze the asset class implications across the four possible election outcomes. Investors should put greater focus on the Blue Wave and status quo outcomes, which our colleagues in the UBS US Office of Public Policy see as the two most probable scenarios.



Pandemic politics

US economy

Equities

Fixed income

Energy

Healthcare

Industrials


Materials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Municipals

Financials

Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Consumer staples



Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

Communication servicesKevin Dennean, Technology and Communication Services Sector Strategist Americas

Tele

com

mu

nic

atio

n

serv

ices

Negative

Higher corporate taxes would reduce profitability.

Neutral

No significant policy changes.

Neutral


Neutral


Med

ia a

nd

en

tert

ain

men

t Modest negative

Potential headwinds from tax reform. If interest rates rise materially, it could be a headwind for valuations.

Neutral

No significant policy changes but regulatory scrutiny continues for internet platforms.

Neutral

No significant policy changes but regulatory scrutiny continues for internet platforms.

Modest negative

If interest rates rise materi-ally, it could be a headwind for valuations. No real change in regulatory risk.

Consumer discretionaryRob Samuels, Consumer Sector Strategist Americas

Ret

ail

Mixed

Increase in corporate tax rate and potentially higher minimum wage; offset by greater fiscal support and lower trade risks.

Mixed

Trade tensions ease but more limited fiscal stimu-lus.

Mixed

Trade tensions could rise and more limited fiscal stimulus.

Mixed

An extension of personal tax cuts would likely be offset by higher trade risks.

Serv

ices

Modest negative

Increase in corporate tax rate and potentially higher minimum wage; some-what offset by greater fis-cal support.

Mixed

More limited fiscal stimu-lus.

Mixed

More limited fiscal stimu-lus.

Modest positive

An extension of personal tax cuts.

Du

rab

les

and

ap

par

el

Mixed

Increase in corporate tax rate and potentially higher minimum wage; offset by greater fiscal support and lower trade risks.

Mixed

Trade tensions ease but more limited fiscal stimu-lus.

Mixed

Trade tensions could rise and more limited fiscal stimulus.

Mixed

An extension of personal tax cuts would likely be offset by higher trade risks.

Consumer staplesRob Samuels, Consumer Sector Strategist Americas

Foo

d, b

ever

age,

an

d t

ob

acco

Modest negative

Higher corporate taxes and potential for more regulation on tobacco somewhat offset by greater fiscal stimulus.

Neutral


Neutral


Neutral





Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Healthcare

Industrials


Materials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Municipals

Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Financials

Energy

Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

Foo

d a

nd

st

aple

s re

taili

ng Mixed

Increase in corporate tax rate and potentially higher minimum wage; offset by greater fiscal support.

Neutral


Neutral


Neutral


Ho

use

ho

ld

pro

du

cts Mixed

Increase in corporate tax rate; offset by greater fis-cal support.

Neutral


Neutral


Neutral


EnergyNicole Decker, Energy Sector Strategist Americas

Ener

gy

Negative

Clean fuels agenda aimed at battling climate change and removal of certain industry subsidies moves ahead. A potential halt on oil and gas drilling permits on federal lands. Fracking ban unlikely. Potential for Iranian supply to return to the market.

Modest negative

US could rejoin Iran nuclear deal, provide sanc-tions relief for Iran and Venezuela, and halt oil and gas drilling permits on federal lands.

Modest positive

Relief rally on no change to environmental stan-dards and oil and gas drill-ing policies. Maintain a tough foreign policy stance on oil-producing nations like Iran and Vene-zuela.

Modest positive

Regulatory and energy policy would be favorable. Maintain a tough foreign policy stance on oil-pro-ducing nations like Iran and Venezuela.

FinancialsBradley Ball, Financials Sector Strategist Americas

Ban

ks

Modest negative

Higher taxes, re-regula-tion, and generally nega-tive political rhetoric toward financials offset benefits of increased gov-ernment spending and slightly higher inflation and interest rates.

Modest negative

Limited fiscal expansion and more regulation. Lower trade tensions and global macroeconomic stability dampened by higher compliance costs.

Modest positive

Limited fiscal expansion but continued lenient regu-lation. Potential relief rally.

Positive

Benefit from infrastructure spending, extension of personal tax cuts, ongoing regulatory relief, as well as slightly higher inflation and interest rates.

Div

ersi

fied

fin

anci

als Modest negative

Higher taxes, re-regula-tion, and generally nega-tive political rhetoric toward financials offset benefits of increased gov-ernment spending and slightly higher inflation and interest rates.

Modest negative

Limited fiscal expansion and more regulation. Lower trade tensions and global macroeconomic stability dampened by higher compliance costs.

Modest positive

Limited fiscal expansion but continued lenient regu-lation. Potential relief rally.

Positive

Benefit from infrastructure spending, extension of personal tax cuts, ongoing regulatory relief, as well as slightly higher inflation and interest rates.




Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy


Materials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Municipals

Financials

Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Industrials

Healthcare

Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

Insu

ran

ce

Modest negative

Higher corporate taxes. Property and casualty insurers could be exposed to higher claim inflation or liabilities. But higher infla-tion and interest rates would be positive.

Modest negative

Possibly tighter regulation.

Neutral


Positive

Infrastructure spending, extension of personal tax cuts, and ongoing regula-tory relief. Higher inflation and higher rates would be positive.

HealthcareEric Potoker, Health Care Sector Strategist Americas

Phar

ma/

bio

tech Modest negative

Fears of negative drug pricing legislation increase.

Positive

No changes or moderate changes that have limited impact remove issue in the near term.

Mixed

Unlikely to be major focus on drug pricing, but there could be future compro-mises that lead to negative legislation.

Modest positive

Unlikely any major changes to pharmaceutical pricing.

Life

sci

ence

s to

ols

Modest positive

More funding toward the National Institutes of Health (NIH), but higher taxes would be a slight offset.

Positive

More funding to NIH and higher corporate taxes would be less likely.

Positive

Stable NIH funding along with no increase to corpo-rate taxes.

Positive

Stable NIH funding along with no increase to corpo-rate taxes.

Med

ical

dev

ices

an

d p

rod

uct

s Neutral

Coverage expansion would be positive, but higher corporate taxes would be negative.

Modest positive

Coverage expansion and higher corporate taxes are both unlikely.

Modest positive


Modest positive


Hea

lth

care

ser

vice

s an

d m

anag

ed c

are Modest negative

Fear of Public Option, pressure on employer insurance, and declining payer mix for providers. Partially offset by some coverage expansion.

Modest positive

Lower risk of major change to health insurance market and payer mix.

Modest positive

Lower risk of major change to health insurance market and payer mix.

Mixed

Increased probability that Affordable Care Act is ter-minated and could destabi-lize and bring uncertainty.

IndustrialsAdam Scheiner, Industrials and Materials Sector Strategist Americas

Cap

ital

go

od

s

Modest positive

Higher corporate taxes should be more than off-set by more benign trade policy and increased stim-ulus. Possible downside risks for defense compa-nies. Higher likelihood of significant national Infra-structure investment.

Positive

Trade tensions ease. Less concern about cuts in defense spending. Infra-structure investment will receive renewed attention but the size of the federal investment would be lower than in a Blue Wave.

Modest negative

Higher trade tensions but less downside risk for defense spending. Infra-structure will receive renewed attention but the size of the federal invest-ment would be lower than in a Blue Wave.

Modest negative

Higher trade risks only partially offset by increased stimulus spend-ing and the positive for defense spending.




Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy

Healthcare

Industrials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Municipals

Financials

Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Materials


Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

Tran

spo

rtat

ion Modest positive

Increased stimulus should boost overall volumes, but increased regulation is a risk.

Modest positive

Trade tensions ease.

Modest negative

Trade tensions rise.

Modest negative

Increased trade war risks are only partially offset by further stimulus.

Serv

ice

com

pan

ies Neutral

Increased stimulus offset by higher taxes as these companies derive most of their income from the US.

Neutral


Neutral


Neutral


Information technologyKevin Dennean, Technology and Communication Services Sector Strategist Americas

Soft

war

e an

d

serv

ices

Modest negative


Neutral


Neutral


Modest negative

Potential for increased risk of China/technology ten-sions. If interest rates rise materially, it could be a headwind for valuations.

IT h

ard

war

e

Modest negative


Neutral


Neutral


Modest negative

Potential for increased risk of China/technology ten-sions. If interest rates rise materially, it could be a headwind for valuations.

Sem

ico

nd

uct

ors Modest positive

If fiscal stimulus leads to faster economic growth, earnings expectations could rise.

Neutral


Neutral


Neutral

Potential for increased risk of China/technology tensions.

MaterialsAdam Scheiner, Industrials and Materials Sector Strategist Americas

Mat

eria

ls

Positive

Higher corporate taxes should be more than off-set by more benign trade policy and increased stim-ulus. Higher likelihood of significant national Infra-structure investment.

Modest positive

Trade tensions ease. Infra-structure investment will receive renewed attention but the size of the federal investment would be lower than in a Blue Wave.

Modest negative

Trade tensions rise. Infra-structure investment will receive renewed attention but the size of the federal investment would be lower than in a Blue Wave.

Neutral

Higher trade tensions off-set by increased stimulus.




Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy

Healthcare

Industrials


Materials

Utilities


Corporate credit

Municipals

Financials

Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Renewable energy

Real estate

Midstream / MLPs

Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

Midstream / MLPsJay Dobson, MLP and Utilities Sector Strategist Americas

Mid

stre

am /

MLP

s

Modest negative

Administrative and legisla-tive policy likely slows potential recovery in US oil production. However, MLP tax benefits could become more valuable if personal tax rates rise. Lower capital spending could be posi-tively received by investors.

Modest negative

Administrative policy likely favors cleaner energy alter-natives, and restrictions on new oil and gas drilling on federal lands could slow any potential recovery in US onshore activity.

Neutral

Federal policies continue to promote the expansion of energy infrastructure, although a recovery in oil and gas prices and US producer activity would be necessary.

Neutral

Federal policies and legis-lation would likely sup-port additional energy production and infra-structure expansion, although a recovery in oil and gas prices and US producer activity would be necessary.

Real estateJonathan Woloshin, Real Estate and Lodging Sector Strategist Americas

Rea

l est

ate

Mixed

5G rollout positive for data centers and towers. Potential tax changes (1031 exchanges, higher capital gains, carried inter-est) negative for commer-cial real estate. Possible changes to Opportunity Zones could reduce their attractiveness. Possible reversal of state and local tax deduction limits would be positive for single fam-ily home values in high tax states. Possible incentives for affordable housing.

Mixed

5G rollout positive for data centers and towers. Changes to the Opportu-nity Zone program might limit attractiveness of cer-tain investments. Possible incentives for affordable housing.

Modest positive

5G rollout positive for data centers and towers. Reduced risk of adverse tax changes for commer-cial real estate.

Positive

Potential relief rally on reduced risk of adverse commercial real estate tax changes. 5G rollout posi-tive for data centers and towers. Potential refine-ments to Opportunity Zone program.

Renewable energyJay Dobson, MLP and Utilities Sector Strategist Americas

Ren

ewab

le e

ner

gy

Positive

Administrative and legisla-tive policies would likely encourage additional renewable investments. Any tax reform would eco-nomically encourage addi-tional utility and non-util-ity renewable investments.

Positive

Administrative policies would likely encourage additional renewable investments. Declining equipment costs would continue to support this investment.

Neutral

Renewables would con-tinue to grow as equip-ment costs decline. This is despite the scheduled ongoing renewable tax credit phase-out.

Neutral

Renewables would con-tinue to grow as equip-ment costs decline. This is despite the scheduled ongoing renewable tax credit phase-out.




Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy

Healthcare

Industrials


Materials

Midstream / MLPs

Real estate

Renewable energy

Municipals

Financials

Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Corporate credit


Utilities

Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

UtilitiesJay Dobson, MLP and Utilities Sector Strategist Americas

Uti

litie

s

Modest positive

Focus on renewable energy and broad infra-structure investment, but practical limits on cus-tomer rate increases annu-ally would limit the benefit to EPS growth. Unfavor-able federal energy policies could be a slight offset.

Modest positive

Likely focus on renewable energy investments and broad infrastructure invest-ment to promote eco-nomic growth. Impact on growth potential would be limited by customer rate increase potential.

Neutral

Utility-scale renewable energy investments con-tinue to grow as equip-ment costs decline. This is despite the scheduled ongoing renewable tax credit phase-out. Electric grid resilency investments would continue.

Neutral

Some additional relax-ation of environmental laws would be possible, but renewables and grid resilency investments would continue.

Treasuries and agenciesLeslie Falconio, Senior Fixed Income Strategist Americas

Trea

suri

es a

nd

ag

enci

es

Neutral

The market may witness some initial volatility after the election. Higher infla-tion expectations on renewed fiscal stimulus follows but would be par-tially offset by expecta-tions that higher taxes will suppress the economic growth rate, allowing the Fed to postpone any change in loose monetary policy. GSE reform proba-bility declines as afford-ability becomes the pri-mary focus.

Neutral

No initial change to infla-tion expectations due to federal fiscal policy. Inter-est rates move higher gradually as economy recovers from pandemic and deficits rise. Fed mon-etary policy changes on hold. GSE reform unlikely.

Neutral

No initial change to infla-tion expectations due to federal fiscal policy. Inter-est rates move higher gradually as economy recovers from pandemic and deficits rise. Fed mon-etary policy changes on hold. GSE reform unlikely.

Modest negative

Longer-end Treasury yields move higher as inflation rises faster on stronger economic growth, absence of tax increases, and fewer constraints on deficit spending. Yield curve steepens. Potential GSE reform, but not until 2022.

Corporate creditBarry McAlinden, Senior Credit Strategist Americas

Fin

anci

als/

ban

ks

Modest negative

To the extent that more stringent regulation makes banks more “util-ity-like,” it is a better out-come for bank creditors than stockholders. But negative sentiment for bank equities would likely have implications across the capital structure.

Neutral

The bias toward more reg-ulation is a better out-come for bank creditors than stockholders. The potential for higher corpo-rate taxes is lessened under a divided Congress.

Modest positive

Against continuation of lower taxes and lenient regulation, bank credit will primarily be driven by the trajectory of the US economy.

Modest positive

The best scenario for bank equities (infrastructure spending, extension of tax cuts, and ongoing regula-tory relief) would likely have positive implications across the capital struc-ture, but the implications are better for equities than creditors.




Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy

Healthcare

Industrials


Materials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Financials

Introduction

Investment ideas

Scenario analysis

Fiscal policies

Personal taxes

Interview

Municipals

Scen

ario Blue Wave

DDD

50% probability*


10% probability*

Trump Status quo

35% probability*

Red Wave RRR

5% probability*

Ind

ust

rial

s

Modest negative

Implications vary by sub-sector, but higher corpo-rate taxes are a main fac-tor that would reduce issuers’ after-tax cash flows. Pharma and energy sectors could see head-winds, whereas diversified industrial companies stand to benefit from spending initiatives.

Neutral

The potential for higher corporate taxes is lessened under a divided Congress. This is a main factor that would impact issuers’ after-tax cash flows. Pharma and energy could see less headwinds than the Blue Wave scenario.

Modest positive

Continuation of current tax regime benefits issuers’ after-tax cash flows. With a continuation of current policies, industrial credit will be primarily driven by the economic trajectory.

Modest positive

Continuation of current tax regime improves cor-porate borrowers’ after-tax cash flows. This is par-tially offset by the potential for increased trade tensions with China.

Uti

litie

s

Modest positive

A corporate tax rate increase would be passed on to regulated customers and benefit utilities cash flow metrics. A focus on investments in renewables increases rate-based spending; much would depend on the degree to which utilities can recap-ture the cost of invest-ments through the cus-tomer rate base.

Modest positive

A corporate tax rate increase is possible but less likely. More stringent federal regulations would lead to more capital spending on renewables; much would depend on the degree to which utili-ties can recapture the cost of investments through the customer rate base.

Neutral

Current tax rates and investment spending are reflected in the existing credit profiles for utilities.

Neutral

Current tax rates and investment spending are reflected in the existing credit profiles for utilities.

MunicipalsKathleen McNamara, Senior Municipal Strategist Americas

Mu

nic

ipal

s

Positive

Renewed fiscal stimulus would support state and local credit, while prospect of higher marginal tax rates would increase the attractiveness of tax-exempt debt.

Modest positive

Enactment of legislation to raise personal income taxes less likely, but a Biden administration would be more likely to push for more federal financial assistance to state and local government.

Neutral

Another round of fiscal stimulus is likely, but the size and scope of the package would be limited.

Negative

Lower probability of signif-icant federal assistance for state and local govern-ment raises the level of concern regarding state and local credit conditions.




Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy

Healthcare

Industrials


Materials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Municipals

Financials

Introduction

Investment ideas

Fiscal policies

Interview

Personal taxes

Scenario analysis

Unlike corporate taxes, individual income taxes are unlikely to be market-moving. Even so, we believe that the proposed personal income tax changes should be a key focus for investors as we approach the election and the end of the year. That’s be-cause tax increases can affect your finances across all time horizons: a decrease in your take-home pay during your working years, less purchasing power in retirement, and a smaller bequest for your children. Under a Biden administration—and in particular under a Blue Wave scenario with a Democratic Congress—we expect to see several changes to personal taxes. Of the proposed provi-sions likely to be considered, and summarized in Fig. 4, we believe that three are of particular note.

Personal taxes are probably going higher if Biden is elected. What should you do?

1. Income and payroll taxes

First, there are a few proposals that impact taxes on income. Biden has proposed an increase in the top marginal income tax rate from 37% to 39.6%, returning it to the level it was before the 2017 Tax Cuts and Jobs Act (and the level to which it is al-ready slated to return when the TCJA provisions sunset at the end of 2025). Biden has also pro-posed adding the 12.4% payroll tax to incomes over USD 400,000 per year, but this latter proposal may be more difficult to implement through bud-get reconciliation.

Investors can defer their income taxes by contribut-ing to a 401(k)—or by making a deductible contri-bution to an IRA. The payroll tax is mostly unavoid-able for employees (unless you have a way to reduce your earned income), but employers do have options. For example, they can choose to pro-vide certain noncash benefits—retirement plan-ning services, child and dependent care assistance, healthcare, etc.—in lieu of bonuses or higher sala-ries. These expenses may still be deductible for the business, but not included as compensation for the purposes of payroll taxes.

2. Dividend and capital gains taxes

Second, Biden has proposed raising the capital gains and dividend tax rate from a current top rate of 20% (23.8% including the 3.8% Net Invest-ment Income Tax) to 39.6% (43.4% including the NIIT) for those investors with taxable income over USD 1 million.

High-income investors can take some of the bite out of this proposed tax through “asset location” strategies, which involve allocating investments (stocks, funds, etc.) into the right accounts (tax-able, tax-deferred, tax-exempt) to maximize after-tax return. For example, wealthy investors can fo-cus their non-IRA account investments on stocks that derive more of their return from capital appre-ciation rather than dividend payment policies, and on investment vehicles with low turnover in order to defer the realization of capital gains.

Even though capital gains tax rates are likely to go higher from here, deferring capital gains tax real-ization is usually better than locking in today’s low tax rate (read more here). In a regime of higher capital gains tax rates, investors can further en-hance their after-tax return potential in their non-IRA accounts by deferring capital gains through strategies such as tax-loss harvesting, which would become even more valuable after such a change. While we don’t know all of the specifics of the proposed legislation, if investors can realize capital gains in a year when they have lower taxable in-come, they may also be able to continue to pay the current tax rate.

Justin WaringInvestment Strategist Americas

Ainsley CarboneTotal Wealth Strategist Americas


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Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy

Healthcare

Industrials


Materials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Municipals

Financials

Introduction

Investment ideas

Fiscal policies

3. Estate taxes

Under current law, an individual can give away USD 11.58 million (USD 23.16 million for married cou-ples) to others during their lifetime or at death without being subject to gift or estate taxes (which have a top tax rate of 40% for amounts over USD 1 million). Under a Biden administration, this lifetime exemption is likely to fall to just USD 3.5 million per individual (USD 7 million per married couple)—a change that could be retroactive to 1 January 2021.

As a result, it’s possible that your family could pass wealth tax-free on 31 December 2020, but pay millions in taxes for the same transfer on 1 January 2021. This creates an urgent priority for wealthy families to do estate planning and wealth trans-fers. In order to beat the deadline, we strongly recommend against procrastinating until the

Did you know? If Donald Trump is reelected, it would be the first time in American history that four consecutive presidents were elected to a second term of office.

makeup of the Congress and White House is de-termined in November. After all, it can take time to organize things properly with your estate attor-ney, financial advisor, and accountant, and any gifts you want to make this year will need to be completed by 31 December.

For more information, please see our Modern Re-tirement Monthly report, “2020 tax planning for retirees.”

Join the conversation

Join us for a virtual event series about the investment implications of this pivotal election cycle. The next two events will be held on 5 October and 29 October at 6:30 p.m. ET.

For more details, visit ubs.com/electionwatch2020

Interview

Personal taxes

Scenario analysis


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https://www.ubs.com/us/en/wealth-management/election-watch-2020.html

This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.


Pandemic politics

US economy

Equities

Fixed income



Consumer staples

Energy

Healthcare

Industrials


Materials

Midstream / MLPs

Real estate

Renewable energy

Utilities


Corporate credit

Municipals

Financials

Introduction

Investment ideas

Fiscal policies

Scenario analysis

Personal taxes

Interview

The UBS Chief Investment Office sat down for an in-terview with John Savercool last week. The follow-ing is an excerpt of that conversation. A complete transcript may be found at ubs.com/electionwatch.

CIO: Will Congress reach a compromise on an-other round of fiscal stimulus, either before the election or in a lame-duck session of Con-gress in December?

JS: We do not sense much urgency by either side to compromise. This could change if the economy shows significant signs of weakness or voters send a clear message about the urgency of additional aid, but another stimulus bill before the elections seems unlikely.

The current fiscal year ends on 30 September. Congress must pass and the president must sign legislation to fund government agencies by this time to ensure that the government continues to be funded into the new fiscal year, which begins 1 October. Democrats and Republicans don’t agree on much these days, but neither side wants to have a government shutdown before they face the voters in November. So, both sides will agree to a “continuing resolution” that will probably fund the government into December, thus necessitating an-other agreement on government funding before the end of the year. While there will be significant interest and pressure to load up the continuing resolution with various stimulus measures, we don’t think that is likely at this point.

CIO: The importance of infrastructure to eco-nomic growth is self-evident. Will the next administration take a serious run at the issue?

JS: While an infrastructure investment package likely would be very important for either adminis-tration, the first priority still would be addressing the pandemic and the economic recovery by pass-ing a large stimulus package at a time when the publicly held debt already sits at USD 21 trillion.

A Biden infrastructure plan would be largely offset through a variety of tax increases. President Trump would also pursue a deal on infrastructure. He likely would need to contend with a Democratic House.

An infrastructure deal in a Trump administration would be much smaller than such a deal in a Blue Wave and likely would be focused much more on highway and road spending than on other priorities.

CIO: If elected, how would each of the candi-dates approach the question of corporate taxation?

JS: Even in a Blue Wave, it is unlikely that Democrats would repeal that entire law, but they certainly would try to rewrite many of its major components. If they assume control of the Senate, which is likely if Biden wins, Democrats would be able to advance these tax law changes through a process called reconciliation, which allows a measure to pass the Senate with a simple majority under limited circumstances.

An increase in the corporate tax rate is a low-hang-ing fruit. The 2017 tax law lowered the corporate tax rate from 35% to 21%. Biden’s plan would in-crease the corporate tax rate to 28%, although the actual level would be determined by such factors as whether the Democrats need additional revenue for spending priorities and the composition of Congress.

CIO: How might the two candidates differ in terms of their approach to federal regulations?

JS: The Trump administration and the Republican Congress rolled back a slew of Obama-era regula-tions in the first two years of the administration, most notably in the energy and environmental ar-eas. I would expect President Trump to continue with the same general approach he has pursued in his first term. A Biden administration would reverse many of those deregulatory actions and pursue an ambitious policy agenda on climate issues, includ-ing a commitment to the Paris climate accord. The banking sector might also face a tougher supervi-sory and enforcement environment.

John SavercoolHead of the UBS US Office of Public Policy

External view

CIO in conversation with John Savercool


https://www.ubs.com/global/en/wealth-management/chief-investment-office/market-insights/regional-outlook/us-elections/2020/john-savercool-interview.html?cc

Appendix


PublisherUBS Financial Services Inc.CIO Global Wealth Management 1285 Avenue of the Americas, 8th FloorNew York, NY 10019

Cover imageGetty Images

Authors Solita MarcelliTom McLoughlinDavid LefkowitzBradley BallAinsley CarboneNicole DeckerKevin Dennean Jay DobsonLeslie FalconioBarry McAlindenKathleen McNamaraEric Potoker Brian RoseRob SamuelsAdam Scheiner Matthew TormeyJustin WaringJonathan Woloshin

Contributors outside CIOJohn SavercoolJohn Nolan

EditorsMark BoehmeAbe De Ramos

Project management John ColluraMatt SiegelHannah ReimerAllie Gorin Danny Kessler

DesignCheryl Seligman

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