Goldman Sachs: How US Equities Are Trading The 2020 Elections

Goldman Sachs note that "the equity market's pricing of tax reform has reflected a tightening election race. US stocks with the highest effective tax rates outperformed low tax peers following the 2017 TCJA tax cuts but have lagged during most of 2020 as polls trended in favor of a Democratic victory. Today, tax baskets imply roughly a 55% likelihood that the proposal by former Vice President Biden to lift the statutory domestic corporate tax rate to 28% is implemented, in line with the probability of a Democratic Senate victory indicated by prediction markets.

• Option prices indicate expectations of an extended period of high volatility beginning around Election Day and lasting for months thereafter. Implied volatility jumps around Election Day, pricing an S&P 500 move of nearly 3%, and the term structure remains elevated well into early 2021. This term structure likely reflects the potential for election results to be finalized with a delay, the possibility of an extended equity market reaction to what is currently a competitive race, and the prospect for vaccine news around the same time. The level of implied volatility sends a clear message: The election matters for equities, and the outcome is highly uncertain."