THE OUTLOOK FOR US MARKETS UNDER BIDEN?
20 January 2021
Fund managers think a Democratic government may benefit equities The theme of Joe Biden’s inauguration - ‘America United’ – is ambitious given recent events in the Capitol. But it is in keeping with inaugural addresses of the past. Abraham Lincoln said he would “bind up the nation’s wounds,” while Franklin D. Roosevelt told US citizens that “this great nation will endure as it has endured, will revive, and will prosper.” Much will be made of Biden’s own inauguration speech, but actions will need to speak louder than words if he is to begin addressing the health and economic crises facing the US. Since November’s election, Democrats have gained control of the Senate, COVID-19 cases have climbed, and stock markets have continued to rise. What should investors look out for in the first few months of Biden’s presidency?
Stimulus and supermajorities Biden wants to hit the ground running: he has already proposed a $1.9 trillion ‘American Rescue Plan’ that would provide relief money to families, state and local governments. This would also help stimulate the economy and the stock market. But, as we saw towards the end of 2020, it may take time for such a bill to pass, even though Democrats now control the House of Representatives, the Senate and the White House for the first time since 2009. This is because Democrats fall short of the 60 votes required to pass legislation in the Senate – what’s also known as a ‘supermajority.’ This requirement is likely to moderate some of Biden’s policy pledges in the short and medium-term, including his Rescue Plan, corporate tax rises, regulation of Big Tech, and clean energy policies. “We don’t expect a Green New Deal, even though there may be attempts to intersperse green initiatives in various bills as they are considered,” says Kristina Hooper, Chief Global Market Strategist at Invesco, co-managers of the St. James's Place Multi Asset fund. The pace at which legislation is passed in the US means the Democrats’ policies will have little impact on the investment process at Aristotle Capital Management, managers of the St. James's Place North American fund. “The process is slow, so to measure that process in terms of two years or four years I think is short-sighted… it takes much longer for these things to happen,” notes fund manager Jim Henderson. He reminds investors that quality businesses with good fundamentals should be able to perform in any political environment.
Boom under Biden? Given the emergencies facing the US, some think that the Biden administration has what it takes to put the US back on the road to economic recovery, which would further improve the outlook for equities. “While divided government has typically appealed to markets, I would argue that it’s perhaps better to have a unified government in a time of crisis – which I believe markets are recognising,” says Hooper, pointing out that the country’s main indices ended the week of the Capitol riots and the Georgia run-offs on a high. “The US is facing a massive health and economic crisis, and so the ability to get nominees confirmed and to legislate is important. But keep in mind this razor-thin margin, which is likely to ensure most legislation is in the ‘centre lane’ for America,” she continues. Anatole Kaletsky, Chief Economist at Gavekal, agrees. “Equity markets face the best possible political complexion in Washington,” he suggests. He explains that, because Congress is likely to eventually agree on a fiscal stimulus bill but is unlikely to pass corporate tax rises, the environment for equities may become “extremely stimulative.” “Luckily, that is exactly what the US economy will need in the two years after its deepest recession on record,” he adds, predicting that the bull market will continue for some time.
In broader context While fiscal stimulus and the economic policy of the incoming administration will influence the economic and market outlook in the US, there are other factors at play. “The stock market has had an upward bias that was created long before the November election, driven by strong monetary policy accommodation from the Federal Reserve,” reminds Kristina Hooper. The US central bank embarked on an asset purchasing programme last year and has kept interest rates low throughout the pandemic. It is expected to remain supportive while the country continues the fight against COVID-19, and in doing so will underpin investor confidence. The US will play a key role in helping the global economy return to growth, and investors are confident that Biden is the man for the job. “The Democrat sweep means we will be increasing our economic growth forecasts for this year and next,” says Keith Wade, Chief Economist at Schroders, managers of the Managed Growth fund. Aristotle, Invesco and Schroders are fund managers for St. James's Place. Where the views and opinions of our fund managers have been quoted these are not necessarily held by St. James's Place Wealth Management or other investment managers and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.