Looking at Markets Through Biden Lenses
This Article was originally published in The Global Analyst
Joe Biden takes over as the U.S. President in what appears to be the most testing phase for the U.S. and global economy. U.S. is still reeling through the COVID-19 effect after losing 385,000 lives so far and 2 million suffering. U.S. economy has witnessed one of the worst economic slumps, which triggered massive monetary and fiscal stimulus response in history. As Biden steers the ship for the next four years, will we see a continuation of the long bull market that U.S. witnessed post the Global Financial Crisis in 2008 or will we experience a steep correction?. While I promise no certain answer to this question, I will try to look at factors that can affect US markets.
On the economy side, business cycle matters more than political presidency as per history. However, it is hard to ignore the connect that Biden may have for the overall economy as he can unleash many policy proposals. The main weapon is the $1.9 trillion fiscal stimulus (expected by March) that will take the total fiscal stimulus of U.S. closer to 25% of 2019 GDP. Massive indeed when benchmarked with India, which stands at just 2% on this count. Putting so much money directly in the pockets of citizens and through investments can jumpstart economic recovery in forms that is unimaginable. For e.g., the real GDP growth of U.S. is expected to hit 8% this year and 4% next year according to Moody’s if the stimulus program goes through as per plan. They even expect full employment by the fall of 2022. While such a massive fiscal stimulus should ideally prove inflationary, experts are divided on this front. Some expect it to play out in the long-run, while others fear a return of inflation. For now, with inflation under control, monetary policy will remain accommodative. The huge fiscal stimulus will result in additional debt and deficit. However, Biden’s worry may not be to control deficit. His worry will be to control COVID-19 and bring the economy back on rails. His pro-labor mindset (in the past and now) will ensure that policy agenda will be geared towards reducing unemployment.
Thus under Biden presidency, U.S. is expected to stage a grand economic recovery on the back of vaccine rollout and fiscal stimulus. The risks of both factors going out of whack seems minimal as of now.
From a sector perspective, 2020 witnessed taking cover under defensive sectors like healthcare and consumer non-discretionary, which generally favors the growth companies. However, phases of economic recovery will now favor cyclical sectors and therefore value play, as they tend to benefit the most when economy emerges out of recession. Biden is known to favor climate change, which should be a positive for ESG, renewables and electric vehicles. These sectors have already run up in anticipation of this trend. The fiscal stimulus will also favor infrastructure related sectors like construction and transportation. The idea of transportation bounce back is real when people emerge out of “work from home” mode and start commuting to offices. Financials may be a neutral sector as it has both positives and negatives going for it. The ultra-low interest rates can be a positive while bankruptcies and concomitant increase in non-performing loans can be a huge risk. The healthcare sector will continue its positive run as I expect minimum changes to drug policies and prices. The spending on healthcare will also not abate so long as the virus is not fully contained. Among the cyclical sectors, industrials and materials are likely to stage a good comeback. Technology will continue to be a favorite theme as some trends can turn structural than transitory (like working from home).
Emerging markets may benefit from Biden presidency as he takes a not-so-confrontational approach to China. The expectation on China will be that Biden may not use tariff as a bargaining tool but will stick to core demands of U.S. with China that includes market access, intellectual property and forced technology transfer. Hence, the U.S.-China relationship will move to more multilateralism and therefore slow moving, which should be a plus for the markets.
The impact of a presidency directly on stocks is still not substantiated enough though Trump claimed credit for the fabulous performance of S&P 500 during his presidency. His era was characterized by low volatility (but for March 2020). It is believed that Biden’s calm approach to issues may also result in calmness to markets in the form of lower volatility. VIX, a good proxy to measure volatility, is now at 30, a far cry from the 52-week high of 82, though much higher than the 52 week low of 11. In terms of impact on stock market, Biden may extend his hand in the form of high tax rates. Biden has proposed several forms of tax increases including statutory rate hike, minimum corporate tax, payroll tax on higher earners, etc. However, this may play out over a period instead of being sudden. Higher taxes may result in EPS falling from $195 to $176 in 2022. In addition, it is believed that Biden may not look at share buybacks in the same friendly manner as Trump. Corporate America has been using buybacks as a serious instrument to bolster earnings per share and if there are any restrictions likely to be imposed by Biden, it can show up in share prices. Biden presidency can also result in more regulations that can increase the cost of doing business for companies. Key sectors that may have additional regulatory burden includes healthcare and financials among other things.
In summary, at least in the initial years of presidency, Biden will play more a role of healer to many disruptions that Trump created. However, we should be careful in extending this to market performance. All said, in spite of erratic policies and style, Trump managed to usher in a great market performance though this is credited more to Federal Reserve than Trump. Hence, what is important to watch is the Fed for the markets more than Biden vs. Trump angle.