A Blue Wave Good for the Economy? ETFs to Buy

Meghann Showers

Chances are rising that the blue wave of Democrats will sweep over the House and Senate in November. Democratic presidential candidate Joe Biden now has better chances of winning the November election. This has triggered a pertinent question of whether this is good for the economy as well as corporates. […]

Chances are rising that the blue wave of Democrats will sweep over the House and Senate in November. Democratic presidential candidate Joe Biden now has better chances of winning the November election. This has triggered a pertinent question of whether this is good for the economy as well as corporates.

Biden leads the presidential race by 53% to 39%, according to a fresh poll of registered voters brought out Sunday by The Wall Street Journal/NBC News, as quoted on Yahoo Finance. Per the article, Goldman Sachs believes that Democrats coming to power could be good for the U.S. economy. Let’s discuss why.

Biden Wants Tax Hike

Biden’s winning means the partial rollback of President Trump’s Tax Cuts and Jobs Act. Notably, President Trump’s tax law lowered the corporate tax rate from 35% to 21%, starting 2018. Analysis by the Tax Foundation reveals that Biden’s plan is to hike the corporate tax rate to 28%.

Biden is also proposing to levy a minimum tax rate of 15% — a potentially damaging outcome for some major companies which pay little in taxes. As far as individual taxes are concerned, Biden’s proposals include a top individual tax rate of 39.6%, up from 37%. Biden’s tax plan is intended to generate more revenues to pay down the huge debt incurred to fight the recession.

Biden has proposed raising the top tax rate for capital gains for the highest earners to 39.6% from 23.8%, the largest real increase in capital gains rates in history. That rate would apply only to households with income exceeding $1 million, which make up the majority of capital-gains income.

Hopes for Solid Fiscal Stimulus

A blue wave “would sharply raise the probability of a fiscal stimulus package of at least $2 trillion shortly after the presidential inauguration on January 20, followed by longer-term spending increases on infrastructure, climate, health care and education that would at least match the likely longer-term tax increases on corporations and upper-income earners,” per Goldman Sachs economist Jan Hatzius, as quoted on Yahoo Finance. Hatzius estimates that a fiscal stimulus package could boost economic growth by two to three percentage points in 2021.

Job Gains

A Democratic election sweep would generate 7 million more jobs than a GOP one, analysis finds, as quoted on Yahoo Finance.The article also mentions that if both the Senate and the House of Representatives are controlled by Democrats, 18.6 million jobs would be added by 2024, according to the analysis from Moody’s Analytics. And if Trump wins and Republicans control both chambers of Congress, 11.2 million jobs would be created. The unemployment rate would improve much faster under Democratic control, slipping to 5.2% in 2022 compared with just 7.1% in a Republican-sweep scenario, per the analysis.

However, Biden’s win may not be extremely lucrative for corporates. Goldman Sachs’ equities strategist David Kostin has projected that Biden’s tax plan would lower its 2021 earnings estimate by 12%. Still, overall economic growth should result in better revenues for companies too.

Against this backdrop, below we highlight a few ETFs that could gain amid Biden’s presidency.

ETFs to Buy

Vanguard Growth Index Fund ETF Shares (VUG)

In a growing economy where rates are low, growth stocks should perform well. The underlying CRSP US Large Cap Growth Index represents the growth companies of the CRSP US Large Cap Index. It charges 4 bps in fees.

Consumer Staples Select Sector SPDR Fund (XLP)

Stimulus plus job gains would boost consumer sectors. The underlying Consumer Staples Select Sector Index seeks to provide an effective representation of the consumer staples sector of the S&P 500 Index. It charges 13 bps in fees.

SPDR S&P Retail ETF (XRT)

Retail stocks which fall in the cyclical sector category should also perform well in a growing economy. The fund XRT charges 35 bps in fees.

First Trust RBA American Industrial Renaissance ETF AIRR

Higher spending on infrastructure means greater industrial activities. The underlying Richard Bernstein Advisors American Industrial Renaissance Index measures the performance of small and mid-cap U.S. companies in the industrial and community banking sectors. The fund charges 70 bps in fees.

Invesco WilderHill Clean Energy ETF PBW

Democrats have always been a supporter of clean energy. So, brighter days await the fund PBW, which is composed of stocks of companies that are publicly traded in the United States and engaged in the business of advancement of cleaner energy and conservation.

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Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports

SPDR SP Retail ETF (XRT): ETF Research Reports

Invesco WilderHill Clean Energy ETF (PBW): ETF Research Reports

Vanguard Growth ETF (VUG): ETF Research Reports

First Trust RBA American Industrial Renaissance ETF (AIRR): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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