The Race to Fiscal and Monetary Stimulus

Week of October 21, 2024

The U.S. election outcome is anyone’s guess, so let’s try to game out the winners and losers from the candidates’ major policy proposals. In the event of a Harris victory, stocks may confront a 28% corporate tax rate, up from the current 21%. Also, the 1% buyback tax that was implemented during the Biden administration could rise to 4%. However, some of this fiscal restriction could be offset by Harris’s plans for household tax credits. Two that stand out are a credit for families with newborns and an enlargement of the Earned Income Tax Credit (EITC).

Should Trump win, the state and local tax (SALT) deduction could come back. Trump has also proposed concepts such as “no tax on tips” and the deductibility of auto loans. Additionally, his best-known proposal is the 20% across-the-board tariff on imports, with a greater hit on Chinese-sourced goods. Finally, manufacturing stocks could see their tax rate cut to 15% in the event of a Trump victory.

The thing about all this is that most of the candidates’ proposals are known quantities. Try to focus on the world around us.

The catalyst for the perpetuation of the global bull market in stocks could be China. This is a recent phenomenon, at least in the COVID-19 and post-COVID-19 era. Until about a quarter or two ago, bulls needed to rest their case despite China. Now, it seems China is the sentiment driver.

The People’s Bank of China (PBoC) decided this was the year to finally goose its balance sheet. Between May and September, the balance jumped by $560 billion, 9.4% increase that brought the total to $6.49 trillion. Next year could see the PBoC’s sum surpass the Federal Reserve, whose own sum has dwindled to $7.08 trillion from nearly $9 trillion during COVID-19.

China has room to stimulate too, because it’s not exactly like stock prices are elevated there. Shanghai A-Shares are changing hands on an earnings yield of 7.9%, or nearly six percentage points north of the 2.1% in 10-Year Chinese government bonds. For context, the S&P 500’s forward P/E is 24, leaving an earnings yield of 4.2%, akin to 10-year T-Notes’ 4.14%.

Take an inventory of China’s announcements. Beyond cuts in the required reserves that financial institutions must hold at the central bank, policy and mortgages rates were also slashed, along with minimum down payment sizes on second home purchases. Critical for stock market investors, the PBoC will also loan money for stock buy backs.

One of the few places we can point to where there is a notable push to tighten financial conditions is India, a country we keep a keen focus on due to that country’s sizeable portion of our asset base. Even there, it’s not like the Reserve Bank of India is really tightening the screws. The big concept out of that country is the central bank’s move from “withdrawal of accommodation” to “neutral.” In other words, there are no big changes there either.

In Europe, business demand for loans has been on the mend for several quarters. After the Russia-Ukraine war started, the Euro Area’s Bank Lending Survey tabulated a net -42.3% on its loan demand diffusion index, a record that exceeded Q1/2009’s low of -39.6%. But the situation in the Q4 survey is materially improved, having crossed over into positive territory with a +3.8% reading on the survey. Yet you wouldn’t know it from the market’s positioning on the European Central Bank’s direction; the consensus has the policy rate dumping from the current 3.25% to below 2% as soon as this upcoming summer.

All in, we are witnessing the world’s largest nations and economic blocs throwing fiscal and monetary stimulus at these markets, with China suddenly joining the fray. They say don’t fight the tape. Don’t fight the policy announcements either.