Heading into November’s presidential election, some political strategists described candidate Joe Biden’s agenda as a “policy revolution.” Now that Democrats have gained a razor-thin margin in the Senate after Raphael Warnock’s and Jon Ossoff’s runoff wins in Georgia, how aggressively the Biden administration pursues its legislative priorities remains to be seen.
Global equity markets generally reacted positively to the presidential election outcome in November. But we may see some volatility in coming days as investors sort out whether the potential for more robust stimulus and higher government spending offsets the possibility of higher taxes and a tighter regulatory environment.
Biden has described the $900 billion relief package Congress passed in December as a down payment on a bigger stimulus. He would like additional funding for testing and COVID-19 vaccinations, aid to cities and states, and another round of stimulus checks.
Biden has proposed raising the corporate rate from 21% to 28%. He also has proposed raising personal income taxes on those earning more than $400,000. Tax hikes would require considerable political will, and it’s unclear when Biden would undertake such an initiative with the U.S. economy in recovery mode and no room for error in the Senate.
Expanding the Affordable Care Act (ACA) is back on the table. We believe health care facilities and providers stand to benefit from ACA expansion while health insurers would come under pressure. Pharmaceutical companies face a mixed outlook. They could encounter price controls on one hand but benefit from health care practitioners writing more prescriptions if more Americans were insured and the government picked up a bigger portion of the tab.
Democratic control of Congress presents a mixed bag for technology companies. In addition to the potential for higher taxes, the sector’s larger companies could face antitrust headwinds. There’s also the potential for regulatory pressure related to privacy and the treatment of gig economy workers. But Biden has proposed additional spending on electric vehicles, 5G technology and artificial intelligence.
Generally, we don’t believe congressional control plays a significant role in emerging markets (EM) performance. Biden’s win improved the EM outlook by reducing the risk of further escalation in trade tensions between the U.S. and its trading counterparts. This is a tailwind to equity markets.
Even though national politics have dominated recent new cycles, government policy represents only one input in our investment decision-making process. We believe more important factors than the election will drive market performance in coming months. And as we highlighted in our most recent Investment Outlook, we believe the trends are positive.
For example, we’re seeing wider distribution of highly effective vaccines that medical scientists believe will slow and eventually stop the spread of COVID-19. Economic growth is improving. And, after a lost year, we expect corporate profits to approach pre-pandemic levels in the quarters ahead. Now, with the presidential election behind us and control of Congress settled, we have less political uncertainty affecting market behavior.
Like you, we’re weary of COVID-19 and eager to transition to the post-pandemic world. The sooner we keep ourselves and people around us safe and healthy, the quicker the return of the normalcy we miss dearly. As stewards of our clients’ capital, we remained focused on their long-term objectives, prudently executing our investment strategies on their behalf.
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