While momentum investors are increasingly focused on ever-higher stock prices, prudent investors should start focusing on the presidential election.
Democratic front-runner Joe Biden released his “Buy American” economic plan to challenge President Trump. Still, investors need to ask how Biden would pay for the plan. He could take away Trump’s tax cuts for corporations and the rich. But Biden and Trump might also share a strategy: Borrow more and influence the Federal Reserve to print more money.
Readers know that I am politically agnostic. My sole job is to help investors. Let’s explore the issue with the help of a chart.
Chart
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA which tracks the Dow Jones Industrial Average DJIA. Note the following:
• The chart is monthly, giving investors a long-term perspective.
• The chart shows the middle support zone.
• The chart shows that based on Biden’s tax policies, the stock market in theory should drop to the middle buy zone. This is about a 20% drop in the stock market.
• Prudent investors should protect themselves from the tail risk of the stock market falling to the “mother of all support zones” shown on the chart.
• The chart shows Arora buy signals and calls for the Dow Jones Industrial Average to reach 30,000 points. From 2012 to today, the majority of the rise in the stock market is attributable to the Fed’s enlarged balance sheet and lower interest rates. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”
• The big money is hiding in the five large-cap tech stocks of Apple AAPL, Amazon AMZN, Microsoft MSFT, Alphabet GOOG GOOGL and Facebook FB. Those five stocks are experiencing a significant “pile-on” effect — buying for reasons that have nothing to do with fundamentals.
• Keep an eye on stocks that would benefit from the Biden plan. Examples include Tesla TSLA, 6.44, Canopy Growth CGC and Centene CNC.
Five contributors to a stock market drop
Here is a simple calculus of what, in theory, should happen with Biden’s tax policy.
• Biden would be likely to increase the capital gains tax, perhaps as high as 39% for upper-income individuals. That could lead to selling before such a law were passed.
• Due to higher corporate tax rates, S&P 500 SPX earnings would take about a 7% hit.
• Due to more regulation, S&P 500 earnings would take a 2%-3% hit.
• Potential restrictions on buybacks and also less free cash flow due to higher corporate taxes would be a negative for the stock market.
• With wealthy individuals paying more taxes, they would have less money to buy stocks….Read more at MarketWatch.
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