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CARES Act 2.0 may be a reality soon; what’s next?

calendar 16/10/2020 - 11:51 UTC

On late Thursday, Dow recovered from the session low on renewed hopes of CARES Act 2.0 as despite ‘war of tweets’, both Trump and Pelosi are negotiating (through Mnuchin, who is largely seen as a dove on policy issues and a good communicator/negotiator balancing two sides). Pelosi and Mnuchin are now finalizing texts on CARES Act 2.0, which may be around $2T, a middle ground between Trump’s above $1.8T and Pelosi’s $2.2T. As Trump is jawboning the stock market by his repeated ‘stimulus’ tweets, Pelosi may have realized that her strategy of ‘all or nothing’ will not keep Dow down and helpful for Biden’s prospect. Thus the CARES Act 2.0 may be a reality soon, just before the Nov election because of the domestic political compulsion of both Trump and Pelosi.

After the world’s ‘fastest’ recovery from COVID-19, Trump now looks far better than a few weeks ago during the 1st Presidential debate; sounds sharp as previously. Trump is an economist by education and a businessman, deal maker and also TV anchor by profession. Trump knows very well how to influence the general public and is far ahead of ‘sleepy Hiden Biden’ in this respect. Thus, although Biden is still ahead by around 10%, Trump’s prospect is not nil at all, especially after the latest corruption allegation (e-mails) involving Russian/Chinese oil companies and Hunter (Biden’s son).

Trump promised payroll tax cuts, capital gain tax cuts, subsidy (tax breaks) for companies to shift supply lines from China, and elsewhere if he wins the Nov election. Trump may also extend his 2017 tax cuts, slated to expire in 2025. And to earn revenue/reduce the corona deficit, Trump may also impose a general tariff of 10% on all imports (in the name of ‘Made in America’ policy).

On the other side, Biden is slated to hike income tax on rich, earning above $400K/year and also corporate tax (after 2025): I will raise taxes for anybody making over $400,000. Let me tell you why I'm going to do it. It’s about time they start paying a fair share of the economic responsibility we have. The very wealthy should pay a fair share – corporations should pay a fair share.

Biden may roll back Trump's 2017 Tax Cuts and Jobs Act and raise the corporate tax rate to 28% from 21%, restore the top individual tax rate to 39.6% from 37%, tax capital gains as ordinary income, cap deductions for high earners, expand the Earned Income Tax Credit for workers over the age of 65 and impose the Social Security payroll tax on wages above $400K.

But all these are possible if either Biden or Trump wins both Senate and Congress, which is now looking very remote. Even if Biden wins both Congress and Senate along with the White House, he may not hike taxes abruptly considering the real situation on the ground (Main Street), where economic recovery is still fragile. Thus, Biden may also have to wait for 2025, the next U.S. election, when Trump’s 2017 tax cuts will expire automatically.

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Overall, Trump is fighting the election on economy, jobs, law & order, the full reopening of the country and “China Virus” (America First policy), while Biden is primarily engaging with Trump’s COVID-19 ‘mismanagement’. The election outcome may be only clear after Dec when all the postal ballots will be counted. And the U.S. Supreme Court may have to intervene if the outcome is quite close. Thus, even by Sunday/Monday, CARES Act 2.00 is finalized for around $2T, after a brief rally, the market may correct on the election and COVID-19 uncertainty.

Bottom line:

On the bigger picture, after the clear election outcome, if Trump wins the White House and Senate, there will be a bigger rally on the appeal of Trumponomics (reflation), but overall policy initiatives will be limited as Democrats may control the Congress (as currently). The possibility of Trump’s trifecta win is very low as of now. But, even if Biden wins the projected trifecta, it may not be a total disaster. After the initial knee-jerk reaction, the market may get a sigh of relief under Biden as there will be fewer tweets on China trade/cold war and less policy uncertainty. But the market may also miss Trump’s volatile and unpredictable tweets over the last few years, the main reason behind the volatility (pre-COVID); Trump is the greatest market maker and job creator (financials) in the U.S. Presidential history!!

Technical Outlook: SPX-500, DJ-30, and NQ-100 (Futs):

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