The smoke is clearing
At this point, it looks clear that the election of 2020 is over. There are a still a few contested fights to be conducted over the next month or two, Georgia’s Senate seat run-off being a key example. With the caveat that nothing is guaranteed, we can still make a reasonable prediction about the environment for new national office holders starting in January 2021: we expect a Biden administration in the White House and a split US Congress, with a Republican leaning Senate and Democrat led House of Representatives. In this paper, we’ll take a look at some of the likely economic and investment outcomes arriving from this political situation.
Economic & market results: the markets have rebounded, but not due to the election
On Saturday, November 7th, news networks and political analysts called the Presidential election for Joe Biden. Early on Monday November 9th, Pfizer announced very positive news on their forthcoming COVID vaccine’s safety and efficacy. Because both of these events occurred before the US markets reopened, it’s not easy to prove which factor is most responsible for the market action since that time. However, the tremendous upswing in pre-market futures following the Pfizer announcement is solid evidence that the vaccine news has had a greater impact on near-term market action.
Moreover, most the economic updates we’ve seen since the results of the Presidential election were settled have been eager to attribute changes in demand and valuations to the vaccine’s progress. Goldman Sachs strategist David Kostin addresses this dichotomy directly, saying, “The divisive U.S. presidential campaign was actually a backdrop to the main event: a public health crisis that has tragically claimed 240,000 lives in the U.S. since it began. However, within less than a year, a vaccine has been discovered.” Within a day of the vaccine news, Goldman had already boosted their year-end price targets for the S&P 500 from 3600 to 3700.
However, despite the progress in the vaccine, most decision makers do not expect our problems to go away overnight; it’s going to take some months to finalize testing, manufacture, and distribute the vaccine. Economic conditions are not likely to fully recover no matter who holds the White House since the virus remains uncontrolled. We have, in previous blog posts, explained our use of oil consumption as a proxy for actual economic output and investor sentiment. The evidence suggests that oil use it still limited. OPEC has cut its 2020 and 20201 oil demand forecasts due to COVID containment measures, and they expect demand to stay constrained until mid-2021.
Political concerns: a split Congress wrangles over stimulus
The prevailing wisdom on Wall Street generally holds that a divided government is ultimately good for business. According to investment manager David Henry, the best outcomes for the stock market have come from similarly divided political regimes (with 14% annualized returns in post-WWII era). Wall Street likes certainty and hates change; a split Congress with deep ideological divides and disparate political incentives can act as a profound block on change. The most recent example of such an environment was the 2nd term of President Obama, which was clearly defined by obstruction and limited legislative action. It is likely that Biden’s administration will fare similarly.
This year, the prevailing wisdom changed a little bit because 2020 is the year of the COVID pandemic. In other words, market analysts are more amenable to bold changes this year, and several analysts on Wall Street wanted a big stimulus bill. There had been some hopeful supposition that an aligned Congress, either red or blue, might actually be more advantageous for the economy because it would increase the scope of a stimulus package to offset the ongoing damage to suffering industries (retail, airlines) which still endure despite limited social mobility. Given the split Congress, it is more likely that a smaller, targeted stimulus package is what we’ll ultimately get.
Going deeper into the future, it is difficult to predict how other agenda items regarding health care, social spending, or energy initiatives could advance. The margins for control of each chamber in Congress is very narrow, with only a few votes to spare on either side. On one hand, this might suggest a bias towards centrism. After all, if you only have to earn a few votes from your opponent’s side, you might be able to coax bipartisan laws through the system with a few modest concessions to the opposition. On the other hand, a deep enmity has been drastically inflamed over the past years. Hurt feelings, limited trust, and incendiary players might make compromise and conciliation a naïve dream. Only time will tell if the temperature gets lowered in Washington and if institutional and behavioral norms reassert themselves.
Investment directions: the Biden administration preferences
While the Biden administration might have preferred a large COVID package, climate legislation, or greater financial reform, there are limits to what it can accomplish when it splits legislative authority with Congress. On the other hand, the executive branch controls some elements of government more explicitly, like international relations. Analysts expect the new administration to be more receptive to diplomacy efforts compared to the Trump administration. Global equities portfolio manager Louise Dudley expects “softer, certainly more collaborative” global trade relations, which ought to result in “fewer trade wars and maybe more negotiations.” These collective decisions may ultimately act as a slight tailwind for international investment opportunities.
Beyond changing the tenor in Washington, President Elect Biden can take executive actions to change the direction of the country. For instance, he has made it clear that the US will rejoin the Paris Agreement and collaborate with other nations to address climate change. As such, it is more probable that infrastructure and spending packages could be directed towards green initiatives. Savvy investors might identify industries and individual companies (solar cell providers, electric vehicle manufacturer and parts providers, battery technology) which might benefit from the new direction.
Legislation shifts: changes to the fiduciary rule
The economy and market forces will inevitably shift with the new political environment, but there are more subtle effects to our industry which can only be understood with time. For example, as our readers know, the Labor Department and Securities and Exchange commission have been wrangling with the fiduciary rule application for several years. Under the guidance of the current administration, the Labor Department was supposed to send a final version of the proposed fiduciary prohibited transaction exemption. Based on information from Faegre Drinker Biddle & Reath law firm, it is entirely possible that the Labor Department will miss its window to have its final results reviewed and published. If that happens, the next administration will have the ability to revert the fiduciary rule back to its original intent, without the SEC Best Interest exemption. In real world terms, the Labor Department has about ten days to finalize its approach or the next administration will likely seek to extend the scope of the fiduciary rule and limit exemptions to its application. We will know in a few weeks if it appears more likely that the fiduciary
A new administration without a coordinated Congress will not be able to force sweeping changes that occurred in the previous two Presidencies, like the Affordable Care Act or the Trump tax cuts. Moreover, Joe Biden has made indications that he’ll try to depoliticize some institutions like the Federal Reserve, so there may not be a staffing purge in important governmental offices. The practical upshot of the 2020 election is that the next four years probably won’t see an immediate tumultuous shift in policy, even if the tone out of Washington becomes marginally less provocative.