Nov 11 2020
After a long, eventful campaign season, Joe Biden has been elected the 46th President of the United States and Congressional elections are becoming clearer. However, significant uncertainty remains over their implications for trade policy, fiscal stimulus, etc.
We asked David M. Darst, CFA about questions investors should ask as the January 20 Inauguration Day approaches.
First, the President-Elect must unite the country amidst the polarization. This was a sharply divided election with razor-thin winning margins and implications abroad. Domestically, big divides exist between the coasts and the heartland, urban and rural, moderate and conservative, and most importantly, between people under and over 40 years old. Biden has already moved to rejoin the Paris Climate Agreement and to reconcile with the World Health Organization. Investors must pay close attention to his transition team and cabinet appointments. Biden has many friends in the Senate given his decades of service, and it would be surprising if he appoints Republicans to his cabinet. Second, the President-Elect must tackle the pandemic after the recent surges, and his first task has been to recruit a taskforce. Third, he must work with Nancy Pelosi, Speaker of the House of Representatives, and Steven Mnuchin, Secretary of the Treasury, to ensure that government spending sustains GDP growth to support the economy. Biden must also ensure that the two Senate races in Georgia on January 5 are conducted fairly, given that it will decide whether Democrats control the Senate.
Harris is likely to receive great attention as the first woman, of both Indian and Caribbean heritage, to hold the position. She is not afraid of the camera. She is young, energetic and will have a great psychological impact on security prices as the administration gets going. It will be interesting to see what roles she is given, just as Vice President Mike Pence was given duties to spearhead the COVID-19 response team. Biden has a long-time familiarity with President Xi of China, so it will be interesting to see how the administration utilizes Harris domestically versus diplomatically.
The Democrats lost key congressional races in Maine and Montana, and have failed to unseat Senator Lindsey Graham and Senate Majority Leader Mitch McConnell. Both were reelected despite Democrats pouring significant funding into the campaigns of their opponents. In the House of Representatives, Democrats were expected to secure 10 to 15 seats to solidify a strong majority. However, that majority appears to have narrowed considerably.
In Georgia, both Senate races will require a runoff vote, the outcome of which will determine whether the Republicans maintain control of the Senate. The stock market rally suggests that markets expect Republicans to win those runoffs, resulting in a divided government and a balance of power in which Republicans hold the Senate. A divided government may provide some near-term relief to sectors such as energy, healthcare, and financials as the new administration would find it more difficult to implement drastic policy changes. Had both chambers of Congress been under Democratic control, overhauls such as aggressive carbon taxes, a public health insurance option, or higher corporate tax rate would be easier.
Many candidates are already positioning for the 2022 midterm elections and Republicans may be within striking distance of reclaiming control of the House by then.
Based on market performance following Congressional mid-term elections since 1901, the chart below shows the strongest market returns under a Democratic President with either a split or Republican Congress, like the current situation.
Before the election, a “blue wave” was predicted in which the Democratic party would control the White House and Senate while maintaining its majority in the House of Representatives. Had this occurred, it would have led to greater spending on pandemic relief and infrastructure projects, which would in turn have probably led to higher GDP growth, greater Treasury bond issuance, and higher interest rates. Over the past weekend, it became clear that there will be no “blue wave.” The government is likely to remain divided with Democrats controlling the White House and the House of Representatives and Republicans retaining the Senate and increasing seats in the House of Representatives. An imminent agreement on a multi-trillion-dollar stimulus bill is unlikely. Senator McConnell said that discussions will resume after the Senate returns from its recess this week, but the lack of a Democratic “blue wave” makes it less likely that a massive stimulus bill will be passed before year-end. A stimulus bill that passes before year-end would probably be smaller, perhaps provisional, and in the range of about $1 trillion.
Biden will have more influence over trade policy than other areas where Congress wields significant power. Global relations policies under the Obama administration could be a good starting point for Biden’s ambitions in terms of trade policy. His first priority will probably be to repair alliances with Europe that were strained under the Trump administration. Biden is likely to work with allies like Europe in coordinating a response to Chinese ambitions, although it is unclear whether this united front will adopt as hardline a stance as the Trump administration did.
Over the past four years, the world has struggled with many foreign policy reversals of the U.S. under President Trump. After the Trump administration disbanded many pre-Trump U.S. multilateral policies that American allies supported tirelessly, they are likely to be more cautious in their commitments to U.S.-led trade initiatives. President Trump has changed the global negotiation landscape permanently, so a complete return to globalization and free trade seems unlikely regardless of Biden’s efforts.
Thank you, David.