After nearly four days of laborious vote counting, the US has a new president-elect. In what follows, we explore the opportunities for change, the challenges in store and the broad implications for the fundamentals that determine asset prices.
New presidential administrations often claim mandates. Frequently, they are accorded political ‘honeymoons’ to initiate policy changes. In more recent and acrimonious US political history, however, mandates have proven ephemeral and honeymoons feel more like broken marriages.
In the coming weeks, both parties will take stock of the outcome as they formulate their political strategies with, as ever, an eye toward the next elections. How the vote is interpreted by the incoming Biden Administration, leadership in Congress and at the state and local level will significantly shape the policies to emerge. And these policies will deeply impact economic growth, public health, regulatory and environmental policies, which in turn will determine how investors respond.
The obvious conclusion from this election is that voters have tired of Donald Trump, his shenanigans and lies, and—above all—his incompetent handling of the Covid-19 pandemic. Voters sent a message that they prefer competence to false bravado, particularly when lives are at stake. The resounding message to Washington, but also to every state capital house, is to engage science and professional management to combat the pandemic. Indeed, in his first speech as president elect, Joe Biden’s only specific policy pronouncement regarded the establishment of a blue-ribbon panel of scientific, medical and public health advisors on pandemic control.
A science-based approach to tackling Covid-19, alone, may explain much of the positive market response to the election outcome. After all, sustainable recovery, the re-establishment of fuller employment and the fortunes of many businesses hinge on pandemic suppression.
As clear as the personal repudiation of Donald Trump was, however, in most other respects the election results delivered mixed messages. Trump himself received over 70 million votes, by far the largest vote total of a losing president. The much anticipated ‘blue wave’ never materialized. Two-run off elections in Georgia will determine whether the Republicans maintain a smaller majority in the US Senate, or whether the final tally might be 50 seats for each party, with Vice President-elect Harris casting the occasional tie-breaking vote.
Meanwhile, Republicans made gains in the House of Representatives, celebrated a net gain of one governorship and held their own in state legislatures nationwide. American voters may have fired Donald Trump, but they did not dismiss the Republican Party.
Accordingly, both President-elect Biden and Republicans on Capitol Hill will contend, with some justification, that the others’ policies do not enjoy the broad support of the electorate. Biden won largely because he pinned blame for the pandemic and its economic consequences on Donald Trump. It is less clear that he won because voters believe his platform offers better solutions to weak growth, skewed income distribution, failing schools or crumbling infrastructure. By a wide margin, voters want those challenges addressed, but have not rendered verdicts as to how.
Equally, the election provides little insight into other major policy challenges. This week the Supreme Court may strike down the Affordable Care Act (i.e., ‘Obamacare’). Polls overwhelming indicate that Americans want access to healthcare and coverage of pre-existing conditions. But the fact that even the Democratic Party, via its primaries, repudiated the single payer option (‘Medicare for All’) touted by its left wing, offers little guidance for what new approach would garner support. For now, at least, the election outcome has been greeted with sighs of relief from private health insurers, hospitals and doctors, who are likely to lobby hard to retain the contours of America’s egregiously expensive and dubious provision of healthcare.
Similarly, the election results produced little visibility on addressing climate change. President-elect Biden may want to re-join the Paris Accord, but any binding treaty changes will face tough challenges in the US Senate. The same is true for carbon taxes. Executive orders are always possible but carry less force in law and are easily reversed in the future.
If the preceding analysis reads less hopefully than the joyous celebrations that broke out across US cities this past Saturday evening, it is worth noting that in two areas a Biden Administration can make a decisive contribution for the betterment of Americans and the world.
Ironically, the first step is not following in the footsteps of the Clinton or Obama Administrations. Like those predecessor Democratic White Houses, the Biden Administration will inherit a weakened economy and huge budget deficits courtesy of reckless Republican leadership. But unlike Clinton or Obama, for three reasons President-elect Biden will not act as the fiscal ‘janitor in chief’, cleaning up the Republican mess by raising taxes and cutting expenditures during his first term.
First, his economic team understands that an economy suffering high unemployment and at risk from the pandemic requires fiscal stimulus, not austerity. While hopes for sustained large fiscal stimulus have receded against the prospect of divided government in Washington, austerity is not in the cards.
Second, Fed Chairman Powell has clearly and forcefully signaled both the Fed’s determination to an inflation overshoot and the central bank’s approval of fiscal stimulus. The Fed is willing to subordinate monetary policy to deficit financing for the first time since the Second World War, offering a Biden Administration fiscal latitude without fear of ‘bond market vigilantes’.
Third, Democrats have realized that cleaning up the fiscal mess Republicans have habitually left behind pays few, if any, political dividends. Politics argues against austerity at least as much as economics, at least until after 2022.
Delayed fiscal adjustment, supported by the Federal Reserve, is unambiguously positive for risk assets, including equities. Combined with signs next year that pandemic control is more effective, markets will welcome US fiscal sensibility.
Lastly, President-elect Biden can and likely will lower perceptions of risk across a broad array of foreign policy initiatives. Trade discussions will elbow out acrimonious trade wars. Unhelpful tariffs are likely to be negotiated away. Contrary to misconception, over the past 75 years Democratic administrations have initiated or signed many more multilateral trade agreements than Republicans.
A Biden presidency should also be expected to treat adversaries in a less risky fashion. Russia and China are more likely to be reminded softly that America wields large economic, diplomatic and military sticks, a message reinforced by an incoming administration willing to recommit to its allies and alliances.
For investors, what’s the bottom line?
Mostly, it is positive. Markets will respond favorably to a science-based approach to pandemic control. They will also welcome concerted monetary easing, accompanied by modest fiscal stimulus—and the absence of fiscal austerity. Risk premiums will decline as it becomes apparent that America is willing to re-engage allies and adversaries alike in more conventional and certain ways.
At the same time, markets—perhaps more cynically—will also applaud the lower chances that corporate income taxes will be hiked, that carbon taxes will be imposed, that healthcare will be revolutionized or that big tech will be broken up. Those may be socially less-desirable outcomes, but they, too, will find support on Wall Street.
The 2020 elections may have delivered mixed political messages, but for investors the news is mostly positive.