The stock market is still pricing in a Joe Biden win: Darrell Cronk

Yahoo Finance’s Brian Sozzi and Alexis Christoforous discuss economic and investment implications from the 2020 election in an exclusive interview with Darrell Cronk, Wells Fargo Investment Institute President.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, the 2020 election race between President Trump and Democratic candidate Joe Biden is fast approaching, and investors are betting on volatility and more wild swings in the coming weeks for the stock market. And although the current polls may be showing Biden in the lead, a new election investing report by Wells Fargo says it's important to keep an open perspective here. Joining us now for Yahoo Finance exclusive is Darrell Cronk, president of Wells Fargo Investment institute. Darrell, good to see you this morning.

DARRELL CRONK: You too.

ALEXIS CHRISTOFOROUS: So at this moment, with less than two months to go before the November election, is this market pricing in a Trump win or a Biden win?

DARRELL CRONK: That's a great question, Alexis. Good morning, everyone, glad to be here again. So right now, I think it's still pricing in a Biden win at this point. You have Biden in most of your major national polls leading by anywhere from seven to 10 points. It is important to remember, though, that those leads are not insurmountable, particularly in the last 60 days of the election.

We had big candidate leads close in 1988's election, in 2000's election, and of course, in 2016's election. So I think investors are most concerned if you end up with a full unified government. We tend to outline in the report and think that as the presidential election goes, so goes the key US Senate, which means that if Biden would win, we think the current GOP-controlled Senate at 53 to 47 probably swings slightly Democratic.

And then you have a unified government. And so markets will be wrestling with that and what it means for tax reform or other items.

BRIAN SOZZI: Darrell, it's been a gloomy week in the markets. Hit us with the most amazing scenario for investors. If this were to happen, let's say the stock market would do X, maybe climb over 10% in 2021.

DARRELL CRONK: I think the stock market would probably prefer a Trump win and the Senate staying slightly Republican with the House staying Democrat. So again, the scenario we have today would probably be the best case because it would take off for the markets this idea that potentially corporate taxes go from the current effective tax rate at 21% back up to the proposed 28% that former Vice President Biden is proposing.

You'll recall that it dropped from 35% in the Tax Reform Act of 2017. So that's a big tax advantage, has huge implications, Brian, for margins and then, of course, for earnings per share. Also, we think if you do have a Trump win and the Senate stays in GOP control, you might have interest rates move a little bit higher, you might have the yield curve steepen, and you might actually have the US dollar move a little bit higher and come off its recent trend of a declining trend it's been in since basically March.

ALEXIS CHRISTOFOROUS: If Trump takes the White House but Congress is Democratic, is there just stalemate in Washington for the next four years? And does the market like that, Darrell?

BRIAN SOZZI: Yeah, I think the market does like that. Maybe consumers may not like that as much, but-- because they won't feel like forward progress is made. But the reality is I think the market likes the fact that Washington can't tip over the cards and really wants the economy to start strengthening again. Probably one of your biggest dividing lines between the current candidates rely on both taxes and tax reform and also regulation.

President Trump is much more about rolling-- continuing to roll back the regulation. But former Vice President Biden would like to take regulation back to kind of the Obama-era days and reinstate some of that on key industries like energy, like financials, and some of those areas. So the market is paying very close attention to that, Alexis.

BRIAN SOZZI: Darrell, let me push back on President Trump's winning being good for the markets here. Couldn't it also be said that another term for President Trump would be bad for multinational companies, like an Apple, that he will come out here with nothing to lose, fully drop the hammer on global trade, impact S&P 500 earnings, and stocks go down 10%?

BRIAN SOZZI: That's an excellent point, Brian, and I think a one that should not be easily discounted. So global trade is key, and both candidates take a very different stance. Former Vice President Biden is much more about multilateral agreements, reinstating some of the key global trade organizations, like the World Trade Organization, that President Trump has moved against.

So I think the markets would wrestle with a new administration-- or an existing administration of Trump being much tougher on global trade and moving-- continuing that path of a movement to a unilateral trade negotiation. Even this morning, we see the UK trying to negotiate with key trading partners, like Japan, on its Brexit exit-- on its Brexit. So that's really key for where we go on global trade.

Both candidates, interestingly enough, though, are proposing heavily this continued move away from globalization. Bring back jobs to the US, reinstate manufacturing in the US. Former President Biden's-- or Vice President Biden's plan, the Build Back Better plan would take $700 billion and invest in things like infrastructure and US manufacturing. So both have some more similarities here than most people think.

And the last point on this, Brian, which is key, both candidates, if you really get into the weeds, both are taking a very tough stance on China. And I think we'll continue to take a very tough stance on China.

ALEXIS CHRISTOFOROUS: Darrell, what would you say to investors who are looking to reposition their portfolios in the coming weeks ahead of the election?

DARRELL CRONK: So we would tell them be careful not to make too many drastic changes as it relates to what you think the election outcome may happen. It's funny because the greatest-- when I have conversations with investors, the greatest fear is this unified government, right, where you maybe have Democratic-controlled Congress and Biden in the White House, because of the tax implications. If you go back and look, almost half of presidential years since 1945 have generated unified government.

Three out of the last four presidential cycles have generated unified government. And if you test back over time, unified government has actually averaged almost a point to a point and a half better in annualized returns for the S&P 500 than split government has over that time. So it is important to not jump too far and make drastic changes to your portfolio.

Policy really gets done post the elections. The elections are only the beginning, not the end. So what really drives policy is key Cabinet officials, key appointments of head regulatory bodies, those types of things matter. So we need to watch beyond November 3. So I would encourage investors not to get too drastic one direction or the other on portfolio changes.

ALEXIS CHRISTOFOROUS: Yeah, and we'll see if all that money sitting on the sidelines pours back into the market after the election. Darrell Cronk, president of Wells Fargo Investment Institute, good to see you.

DARRELL CRONK: You too, Alexis. Thank you.