BIDEN WIN AND REPUBLICAN SENATE BRINGS MIXED OUTLOOK FOR INVESTORS
Following an historic election that actually ended up much closer than projected, we’re continuing to track the ongoing developments. Results suggest that voter turnout was the highest in more than 100 years and voters delivered a very close election result for President, Senate, and the House. The political community, in both parties is coalescing around Joe Biden being legitimately elected President. Meanwhile, President Trump wants to pursue every option, as is his privilege. In fact, reflecting on the 2000 election, Democrats suggested they would not concede if any state was below 1 percent this time around, and that I think is holding here on the Republican side. Still, we do not expect a traditional concession from President Trump. It is easy to say “let’s move on”, but we actually think letting some of these issues get legal recourse may prove to be beneficial over the long run. More than 70 million Americans voted for Trump and they are being told the confusing political vote tally, due to the large-scale use of absentee ballots, is a non-issue. Some finality is needed here.
It’s worth pointing out that it is extraordinarily rare for an incoming US president to start the beginning of his term without the Senate being controlled by his own party. The last two times this happened were 1968 and 1988 and both times were with Republican presidents. For a Democratic president, this has not happened since the 1880s. Similarly, we have not had a Democratic president, Republican Senate, and Democratic House since the outcome of the 1884 election. Nonetheless, both the House and Senate will start 2021 more narrowly divided than in the past two years.
Interestingly, the U.S. has now held eight federal elections since the beginning of the financial crisis. In that period, voters have removed the party in power in seven of the eight elections. We think this is quite remarkable, and a reflection of recent economic trends. In fact, going back more than 100 years, we have not seen this level of political volatility on record.
With Joe Biden in the White House, and a potentially divided Congress (Georgia will not be decided until January 5, 2021 runoff election),the political implications for the market going forward are less clear and potentially less impactful than had previously been projected. On the contrary, and despite a recent spike in new Covid cases, the recent release by Pfizer of highly promising vaccine results is giving the broader markets hope. This may also be beckoning a rotation away from the work-from-home winners, as capital begins to seek more attractively valued opportunities. We view this as a positive development, potentially leading back to a market in which realistic fundamentals are important and valuations matter.
WALL STREET TENDS TO LIKE POLITICAL GRIDLOCK
On a very macro level, we think that there will be a modest market reaction to the election in the coming weeks. Markets like gridlock in Washington, and with the potential for a divided Congress, we think the eventual political landscape will impede immediate implementation of at least two of the more noteworthy Biden policy initiatives.
We would expect President-elect Joe Biden to push for another fiscal stimulus package, including funding for municipalities; however getting a stimulus package passed here will not be easy. Nancy Pelosi narrowly got the House stimulus package through in October and is likely to have fewer votes this time. The Republican Senate remains insistent that the jobs growth and the recent Pfizer vaccine developments do not warrant a multi-trillion package this time around.
While Biden supports corporate tax increases, they are very unlikely with a Republican Senate. The tax outlook will not be fully decided until after the Georgia runoff election which is on January 5th. That means that the tax outlook for 2021 will not be known before taxpayers make their year-end plans. As was described in an email earlier this year, we expect to see more special dividends and mergers ahead of year end regardless of what happens in the Senate elections. But we want to be clear, if Republicans hold the Senate, it will be very unlikely that any taxes are going up in 2021. Possible beneficiaries could be companies with the potential for high tax rates, companies with foreign source profits, and dividend growers.
OTHER POSSIBLE POLICY AND INVESTMENT IMPLICATIONS
Better Trade Policies Coming Regardless of the Senate: We think that one of the biggest impacts of this election is the difference in foreign affairs between Trump and Biden. Which party runs the Senate makes little to no difference here. Trump was a strong dollar president, and we think Biden could be a weak dollar president.
Health Care Is A Big Winner In Divided Government: Assuming divided government, we see little chance of Congress enacting a single payer public health insurance option. This keeps the status quo in place which benefits managed care, hospitals, and equipment makers. While there may be fewer chances for large-scale Medicaid expansion in a stimulus package, overall the industry is unlikely to take major cuts. Drug pricing control is also more difficult to achieve. There is bipartisan support for action on drug pricing, but with the House and Senate narrowly divided, it is unlikely that widespread legislation to control prices is in the offing.
Infrastructure: The level of infrastructure spending will be determined by which party controls the Senate. If somehow Democrats are able to take the Senate, we would expect two major pieces of fiscal legislation. The first will be to get the stimulus passed that Congress has failed to do at this point, which is mostly income replacement. The second could be a bigger infrastructure and climate spending package. Passage of that package would likely affect the economy immediately, while under a Republican Senate the results could be more modest with a boost to the economy from the expiring infrastructure package in 2021. We expect the latter.
Renewable Energy Can Benefit From Regulatory Actions But Congress Will Matter For Big Policy Changes: The Biden Administration’s stated energy policy is to regulate and tax fossil fuels while mandating and subsidizing renewable energy. Without Congress, taxing fossil fuels and subsidizing climate spending is more difficult. But Biden could still regulate and mandate to a certain extent while looking for deals to extend wind and solar tax credits.
The collective wisdom of the American voter is calling for compromise. Let’s see if Congress heeds that message.
We hope this email has found you well, and you and your families continue to be healthy as we approach the holiday season.
Please feel free to contact your Atlas Wealth Management Advisor if you have any questions about this or any other financial matter. As always, we are always available to serve you.