Market Extra: Why Goldman Sachs sees a ‘blue wave’ in November as positive for U.S. credit markets

Cocktails called “The Blue Wave” at virtual DNC convention party.

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Many Republicans like to be viewed as the “pro business party,” favoring tax cuts and smaller government as the best way to help American companies prosper.

But the worst public health crisis in a century has turned a lot of conventional thinking on its head, including what might be best for business as the nation works to recover from the pandemic.

“In the U.S., recent polls and prediction markets suggest the odds of a ‘blue wave’ in which Democrats gain unified control of both chambers of Congress, as well as the presidency, have increased,” Goldman Sachs’ credit strategist Lotfi Karoui wrote in note this week. “We see more pros than cons for credit markets.”

To break down his thinking, Karoui admitted that U.S. corporations might face a harder time reducing their current high leverage levels, if there’s a partial rollback of the 2017 Tax Cuts and Jobs Act under a Democrat-controlled government, if it leads to pinched earnings and pressure on free cash flows.

But Karoui also expects “expansionary fiscal policy under a blue wave and the subsequent material boost to growth over the coming years would more than offset the negative impact from higher taxes.”

On the hot-button issue of taxes, former Vice President Joe Biden in his White House election campaign has proposed raising the federal corporate tax rate on domestic income to 28% from 21%, the prevailing rate since Trump’s tax cuts reduced corporate taxes from 35%.

Read: Higher rates for upper-income folks and a bigger child tax credit — what Joe Biden’s tax plan could mean for you

However, a lot will hinge on the timing of any new policy changes in terms of supporting the roughly $10.5 trillion U.S. corporate debt markets, according to Karoui, particularly if corporate tax breaks were quickly rolled back but government fiscal spending was slow to materialize.

On Friday, major U.S. stock indexes looked to end a choppy week on a high note, with the Dow Jones Industrial Average

up about 250 points, or 0.9%, in afternoon trade, putting it on pace for a 0.6% weekly gain, according to FactSet data.

On the debt side, some $8.7 billion flowed into U.S. investment grade corporate bond exchange-traded funds, for the week ending Oct. 14, adding to the $7.8 billion of inflows from the prior week, according to BofA Global data.

The sector’s biggest ETF, the iShares iBoxx $ Investment Grade Corporate Bond ETF

was on pace for a weekly gain of 0.4%, according to FactSet data.

See: 54 bullet points, 800 proposals: No matter Trump or Biden, implementing the winner’s policies is going to be expensive

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