Question of the Week: “With the election being over, what comes next?”
The election results may have surprised some forecasters (and certainly pollsters), as the predicted ‘blue wave’ of Democrats capturing both the Presidency and Senate fell short. Democrats did retain the House of Representatives, as anticipated, although more seats than expected were lost. Looking at results broadly, the electorate remains as divided as ever across the country. Importantly for markets, the Senate appears to be held by the Republicans, although a few final races remain in flux (including a possible dual run-off January election in Georgia). If it persists, the results are meaningful from a standpoint of balance—one party won’t have the ability to push through a singularity of legislation, such as tax increases (a key concern of markets). In this view, the Senate races appeared far more important than the Presidency. Removing this uncertainty was enough to propel sentiment forward.
Equity markets viewed these conditions favorably as the week progressed, as the probability of sweeping progressive reforms and heavy spending evaporated. Election waves with promises more extreme action bring uncertainty over repercussions, and the removal of these risks tend to reward status quo. Other market concerns were embedded in what a sweep would entail, including potentially higher government spending, and accompanying higher corporate taxes and personal capital gains taxes—both negatives for equity fundamentals. With last week’s results, a balance of power results in potentially four years of either necessary compromise or gridlock, but also lowers the chances for radical changes. This offers financial markets the certainty they crave, with the next several years now more easily modeled. (Since World War II, a divided Congress offers better stock market results than several other outcomes.) Of course, the pandemic remains the wildcard that is less than modelable.
From a policy standpoint, with the more progressive agenda off the table, it might be helpful to review what both parties agree on that we could see some progress toward.
- Stimulus. Both parties agree that additional fiscal measures are appropriate and necessary, with differences focused on the amounts and recipients. Unfortunately, it appears negotiations had been fairly close to the finish line several times, but political wrangling over a few key items kept it from getting done. Republicans have been keen on a smaller package, of up to $1 tril. or so, with additional support for troubled business sectors, such as airlines. Democrats favor a far larger package, of well over $2 tril., featuring more and specific aid to individuals and state/local governments. A key sticking point is that several of the neediest governments are located in ‘blue’ states, which the Republican Senate has strongly resisted. Nevertheless, some type of stimulus is likely forthcoming, with timing and amount to be determined.
- Healthcare. Aside from the partisan contentions over the premise and future of the Affordable Care Act, both parties appear in favor or lowering prescription drug prices. As we’ve mentioned in the past, this could be a piecemeal effort, focused on the lowest hanging fruit. Pharma companies argue that high prices are necessary for some drugs to channel profits into continued research and development. The fact that other nations often pay cheaper prices than U.S. consumers has angered a variety of groups, however, seeking greater fairness in the process.
- Infrastructure. Both parties agree on a broad infrastructure plan in principle. Again the devil is in the details. Democrats insist on far greater allocation to ‘green technologies’ for the energy and transportation segments. Republicans, on the other hand, are more closely tied to traditional fossil fuels. Infrastructure is expensive, and there is little doubt that America’s aging roadways, bridges, etc. need a significant upgrade, but the final cost will likely determine how far legislation goes. At the same time, as with FDR’s public works programs of the 1930’s during the Great Depression to some extent, infrastructure upgrades could also be a job creation engine, and provide a boost to economic growth.
- China. Both parties agree on a tougher stance toward China, in light of intellectual property misappropriation and human rights concerns. The rhetoric may be the key differentiator between the two parties, as well as the use of tariffs, which many economists argue aren’t overly effective long-term. This is just a short chapter in a long stretch of Chinese growth, challenging the primacy of the world’s economically dominant nation. The U.S.-China competitive situation is decades in the making—and a common theme in world history.
- Taxation and Business Friendliness. Joe Biden’s platform included plans to raise both personal and corporate taxes to fund additional government plans and programs. Now, with a shared balance of power, that path is blocked, so the Trump tax cuts are seen as likely to remain. Executive branch regulatory actions could pick up a bit (including Biden promising to rescind a variety of Trump executive orders), although the Senate composition puts an obstacle to more radical personal (such as Sen. Elizabeth Warren) from being confirmed to certain high-level posts that require Senate approval.
- Covid. Lastly, now that the election season is past, attention is likely to drift back to the pandemic, which has never moved too far out of mind. In fact, the winter ‘second wave’ seems to be occurring, which challenges health care systems and governments, not eager to embark on another wave of lockdowns that would again hammer at economic growth. This will be a careful and likely political and financial balancing act in coming months as long as Covid remains a problem and a vaccine is not yet available.