After a tense period of waiting, Joe Biden emerged as the victor in the U.S. presidential election over the weekend, regaining control of the White House for Democrats, who also maintained their majority in the U.S. House of Representatives.
The final balance in the U.S. Senate will have to wait for two Georgia runoff elections in January, meaning it remains difficult to speculate about exactly what Biden’s first term will look like. He and Vice President-elect Kamala Harris will preside over either a unified or divided federal government, which will presumably have a major effect on their agenda.
Still, some things are already clear in the eyes of the financial services industry. As Jeff Schulze, investment strategist at ClearBridge Investments, points out, investors have initially cheered this “more moderate outcome,” with equities rallying and the VIX volatility index falling.
“A shift in leadership is emerging relative to pre-election trends, with value and small caps lagging growth and large caps,” Schulze says. “With his victory, Biden continues a pattern of presidential challengers benefiting from economic weakness during the watch of the prior administration. However, the economy appears to have turned the corner, and our ClearBridge Recovery Dashboard remains green, with no changes this month.”
Schulze observes that, in losing both the Electoral College and popular vote, Donald Trump joins the list of post-World War II presidents—along with Gerald Ford, Jimmy Carter and George H.W. Bush—who failed to secure a second term after experiencing a recession within two years of Election Day and a material rise in the unemployment rate the year of the election. This year, it rose from 3.5% in February to 7.9% in September.
Schulze says he believes another stimulus package that addresses the ongoing coronavirus pandemic will be an early priority for the Biden administration, regardless of which party controls the Senate. Unless both Democratic Senate candidates in Georgia win their races, the size and scope of fiscal stimulus is likely to be more limited.
“A bill in the $1 trillion range, representing a compromise between previous Republican and Democrat proposals, seems possible,” Schulze says. “Senate Majority Leader Mitch McConnell stated his support for a stimulus bill on the day after the election, and going forward, his longstanding relationship with Biden could help set the backdrop for more bipartisan cooperation relative to the last several years. … Even if Democrats do ultimately take back the Senate, the final margin and where the 51st vote lies will be an important consideration. The scope of what Democrats can hope to enact will likely be fairly limited given an extremely shallow majority if they do win control of the Senate. This will likely force them to utilize the budget reconciliation process to a greater extent, as it requires only 50 votes (as opposed to a 60-vote filibuster-proof majority) for passage. However, bills passed this way can only impact taxes, spending and deficits for a period of 10 years. Put differently, their lasting impacts are designed to be zero, and the process cannot be used to address larger policy changes.”
As a result, Democratic priorities such as Social Security, minimum wage and environmental regulations would need to be passed with a broader coalition that includes multiple Republican votes, Schulze says, meaning any substantive shifts would likely need to be more centrist in order to draw bipartisan support.
Jack Janasiewicz, portfolio strategist at Natixis Investment Managers, echoes many of Schulze’s points, noting that betting markets and political pundits think that the Republicans will take one, if not both, of Georgia’s Senate election run-offs.
“What does this mean? Gridlock,” Janasiewicz says. “Split Congress means gridlock, which means status quo. It will be difficult for any of the proposals put forward by the Democrats to be ratified by Congress as Republicans flip back to being the party of opposition. Market worries over Biden’s proposed tax increase on corporates and the top 1% will likely be dead on arrival. The same goes for taxing capital gains as ordinary income. But, on the flip side, an upsized COVID-19 response package and any significant infrastructure spending are also probably nonstarters—something the markets were looking forward to as a catalyst to jumpstart growth.”
Janasiewicz says that, at the margins, market watchers should expect a few things to manifest under a Biden White House and a Republican-controlled Senate, assuming that this is the ultimate outcome. He points to such developments as the U.S. rejoining the Paris Accord to mitigate climate change; the easing of global trade tensions; possible reengagement in the Joint Comprehensive Plan of Action, also known as the Iran nuclear deal; and the reaffirmation of the U.S.’s commitment to NATO.
“Expect a Biden administration to continue to address a China containment strategy but with a different approach,” Janasiewicz says. “Tariffs on China are likely to be abandoned and import quotas revisited. Global tech dominance is still at play between the U.S. and China. Don’t expect the friction on the tech front to lessen.”
When it comes to considering companies and sectors that could benefit from the forthcoming legislative conditions, Janasiewicz says, multinationals should benefit from reduced trade tensions and less uncertainty regarding trade policy.
“Emerging markets at the margin should be supported,” he adds. “Less China confrontation coupled with significant global fiscal and monetary policy support provides a sound base.”
Nigel Green, chief executive and founder of deVere Group, says the Biden administration will usher in an “unprecedented boom” for environmental, social and governance (ESG) investments.
“There’s been a massive surge around the world from clients this year looking for such investments,” Green says. “This phenomenon is set to be dramatically accelerated with Joe Biden and Kamala Harris in the White House. They campaigned on issues including climate change, social justice, equality, diversity, human rights and corporate transparency and accountability. On many issues, particularly those relating to the environment, the Biden administration is aiming to reverse policies established by Trump. Such campaign issues will now likely become policy.”
Looking beyond the election, Green says ESG is set to get a major boost due to demographic shifts.
“The biggest-ever generational transfer of wealth, from Baby Boomers to Millennials, who are statistically more likely to seek responsible investment options, is set to take place in the next couple of years,” Green says. “As such, ESG investing is set to grow exponentially in the 2020s. Biden has bold plans that perfectly square with ESG investments—an already burgeoning market. We can expect the boom to intensify further.”
Colin Moore, global chief investment officer (CIO) at Columbia Threadneedle Investments, says he expects that mitigating the impact of the COVID-19 pandemic on the U.S. economy and the lives of those most affected will be the principal challenge for Biden and his team.
“As we move past the drama of the election, it will be critical for leaders to get back to negotiating on programs that can support the individuals, businesses and municipalities most impacted by COVID-19,” Moore says. “Given the greater possibility of split control of Congress (a Democratic House and a Republican Senate) the size of the stimulus package is likely to be smaller, but that may be OK. In the first round, speed was critical, but, with hindsight, the support was spread too widely. The upcoming lame duck session of Congress provides a window for Congress to enact additional targeted assistance.”
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