November 09, 2020
Clarity on the US election outcome allowed MSCI’s index of global stocks to sail to a new all-time high this morning after a win in Pennsylvania secured the White House for Joe Biden. While the Democrats took the Oval Office, A “blue wave” did not ensue, with the Republicans strengthening their foothold in the Dem-led House of Representatives and appearing to have kept the Senate (though the final composition may not be clear until runoff votes in Georgia in January). While a divided government has previously been associated with legislative gridlock, markets are taking a Panglossian stance, viewing it as potentially the most favourable outcome: A Democratic president keen to disburse more fiscal stimulus, who will not veer too far to the left due to a Republican presence in Congress that will ensure checks and balances.
The Best of Both Worlds
The composition of government resulting from the 2020 elections probably means that policy will not go too far in either direction. In a nutshell, we expect moderation; a welcome word in the highly-polarised US political landscape.
The outcome heralds good news for global trade. With Biden in the Oval Office, trade wars are less likely (something that held markets hostage before the Coronavirus outbreak). Hopes for less abrasive US foreign policies were visible in the stronger Chinese yuan and on European and Asian bourses on Monday. Already, EU trade ministers are congregating to reconsider the eurozone’s trade relationship with a post-Trump US and Germany has proposed that a new tax on US goods is delayed in light of the changes in the US administrative landscape.
A more stable foreign policy emanating from the White House would spell good news for emerging market equities, especially in Asia, a region that was already attracting strong flows due to its containment of Covid-19.
At the same time, a divided government may mean that the Trump policies which made Wall Street swoon will not be unwound by Biden. At the beginning of his tenure, President Trump was quick to slide the knife through corporate tax rates, cutting them from 35% to 21%. Biden’s proposed tax plan involves a partial reversal of the 2017 Trump tax cuts, from 21% to 28%, but the President-elect would have an uphill battle pushing this through the Senate. Thus, higher taxes are unlikely for the time being, especially while focus falls on the economic recovery in the aftermath of the pandemic. There is a chance that the Democrats come with more regulations and policies that are hostile to the financial sector, but the risk is not viewed as immediate, nor outsized for now.
With regard to a much anticipated fiscal stimulus deal, Mitch McConnell, the Senate majority leader who was re-elected in Kentucky, called for a limited package of measures to be approved before the end of 2020 stating “hopefully the partisan passions that prevented us from doing another rescue package will subside with the election.” These discussions will continue to be a focal point for markets and the economy will remain as the focal point for the Government, no matter who is at the helm. If a Republican Senate pushes for a degree of fiscal conservatism, this means the economy would still receive much-needed support but it would not heap as much debt onto the already-burgeoning twin deficits. Government bond yields wilted in anticipation of less borrowing and more quantitative easing from the Federal Reserve.
Senate Republicans, could also challenge Biden’s nominations for top positions in the administration, such as secretary of state and Treasury secretary, compelling Biden to select candidates that are more centrist. According to reports, Lael Brainard, a Fed governor, is one of the potential candidates for the Treasury secretary position.
Biden is scheduled to take the reins on January 20th 2021. On his transition website (www.buildbackbetter.com) he has outlined four key areas that he will focus on from Day 1:
- Covid 19
- Economic recovery
- Racial justice
- Climate change
The US is still in the teeth of the pandemic, having registered over 10 million cases and 240,000 fatalities. Biden, who has been highly critical of Trump’s approach in dealing with the health crisis will announce his own Coronavirus task force on Monday. He will emphasise a federal approach rather than leaving states to craft their own responses. The Democrats, due to beliefs on accessibility and pricing, are traditionally viewed as less favourable for healthcare stocks and pharmaceuticals but for now, fighting the pandemic will take precedence, reducing the risks to the sector. Good news on the health front came on Monday after Pfizer Inc. said that its Covid-19 vaccine prevented more than 90% of infections in a large-scale study.
With the regard to the economic recovery, one area where Biden may face less resistance in a Republican Senate is on infrastructure spending, recognised as key on both sides. The Biden-Harris economic recovery plan, aims to “mobilize American manufacturing and innovation to ensure that the future is made in America” to “mobilize American ingenuity to build a modern infrastructure and an equitable, clean energy future” and to deliver an “updated social contract that treats American workers and working families as essential at all times.” Industrials including manufacturing, infrastructure, construction, robotics, energy, aerospace, satellites, railroads and trucking equipment and agriculture names could all benefit. Consumer Discretionary stocks are also likely to benefit: The consumer sector is of key importance to the US economy (both as service providers as well as employers). It is likely that politicians on both sides will consider the health and profitability of the sector in any policymaking.
Biden has also vowed to reverse the process of leaving the World Health Organization and to swiftly re-enter the Paris climate accord (which Trump pulled the US out of in 2017). Biden aspires towards US carbon neutrality by 2050 and to bring power industry emissions to net zero by 2035 – a goal that looks highly ambitious in a divided government. The oil price rose on the news of Biden’s election and ultimately his candidacy does not bode well for US energy names.
Initially there were fears that a Democratic win would spell trouble for big Tech, ushering in new antitrust rules. While there is still a risk of this further down the line, the pandemic has increased reliance on technology and the sector is unlikely to be tampered with for now. While Biden is probably paying less attention to the stock market than Trump, he is surely cognisant that any move against big tech could also cause a tantrum in markets: The FAAMG stocks account for 20% of the total US market value.
Bidding goodbye to Trump
The key unknown is whether Trump’s bark will prove to be worse than his bite when it comes to pursuing legal avenues to contest the result. 24 hours after Biden was declared the winner, the incumbent President (the first to lose a re-election bid in 28 years) had not yet called him to concede in a break from tradition. The NYT reports that White House advisers have warned President Trump of his narrow chances in any legal fight and high profile Republicans, namely former President George Bush, have publicly declared the election over. In the past, re-counts have changed the outcome by a few hundred votes: Biden has a wide margin in the thousands.
However, even if Trump does concede he still has roughly three months left in office. Perhaps, having always used the stock market as a barometer of his success, he will pursue market-friendly policies, wishing to leave on a high note. Let’s just hope he does not take the approach of Louis XV and declare “après moi le déluge.” He could indeed cause trouble by failing to cooperate with the Biden transition team — a crucial part of government continuity.
In all, the result of the elections basically means much of the same with sweeping changes unlikely due to the divided Congress and the ongoing health crisis. Whoever is in the Oval Office, regardless of their beliefs, is for now forced to direct all resources towards fighting the pandemic and rebuilding the economy.
Author: Group Investment Office