From Trade War to 2020 Election

The never ending trade war, it feels like that is all the stock market cares about.  But it is October 2019, 13 months from the 2020 US election.  And less than 6 months from basically knowing who the 2020 Democratic candidate will be.  Whatever is done on trade will have diminishing effects on the market the closer we get to November 2020.  By next year, the focus will be on who wins in 2020 election, which determines much more important factors such as tax policy, corporate regulations, health care policy, and anti-trust actions. 

The most popular political betting market, Predictit, has Elizabeth Warren as a clear favorite to win the Democratic nomination, at 47%.  Even with the average of the polls showing her at about a statistical tie with Joe Biden, the betting markets don't think that will be the case next year, as Biden's popularity is falling while Warren's is rising. 

There was one fund manager on CNBC, who said that the stock market wouldn't open if Warren won in November.  That gives you a general feeling about what Wall Street thinks about her effect on the stock market.  I usually don't agree with these politically charged views on candidates and how they affect the stock market, but I do agree with the consensus this time.  Elizabeth Warren would be a nightmare for the SPX.  This is based on her plans to put a 2% wealth tax, as well as looking to do Medicare for All, a budget buster which would be funded with tax increases across the board, both income and corporate. 

The current US health care system is a huge source of profits for the health care sector in the S&P 500, cutting out the middle man and making the US government the health care insurance provider would be getting rid of a huge source of economic rents the health insurers and pharmaceuticals take from the general public. 

The increase in taxes is obvious, because anytime there are more taxes taken from the wealthy and from corporations, it reduces the amount of buying power available for stock buybacks and stock buying from the public.  The only reason the markets went up so much in 2017 was because of the anticipation of the huge corporate tax cuts and overseas fund repatriation amnesty which fueled the stock buyback frenzy in 2018.  Those aftereffects are what are keeping the SPX at such high valuations. 

Looking ahead, the current obsession over the trade war will be mostly forget and will be almost meaningless in the heat of the 2020 election season.  And a Warren presidency would be so much more bearish for the stock market than any escalation in the trade war that Trump goes with if he wins in 2020. 

We got a nasty little selloff yesterday based on dimming hopes of a trade deal.  The expectations are getting really low now, so any tiny bit of good news over the next few days will probably have an oversized positive effect on the stock market.  If we get bad news and no deal, we may get a knee jerk selloff day but I don't think it lasts for long, as the current consensus is that there won't be anything substantial done.