Stock markets surged higher on Wednesday and Thursday, with the S&P 500 (SPX) gaining more than 2% each day, despite fears that a drawn-out election process would create volatility-inducing policy uncertainty.
Though chances are good that Republicans maintain a thin grip on the U.S. Senate, thus reducing the odds that a $2 trillion to $3 trillion stimulus package gets passed, the market is betting that more stimulus will still be in the offing, while the lack of large Democratic majorities in Congress will reduce the chances of stiff new business regulations.
“With no blue wave, we are likely to see the Senate remain very closely divided, which will constrain the policy options of whoever wins the presidency,” Brad McMillan, chief investment officer for Commonwealth Financial Network, said in an email. “That probably rules out any substantial activity on taxes, as well as limiting any actions to control the major tech firms.”
On the stimulus front, Mitch McConnell said Wednesday that “we need another rescue package,” and that he hopes one can be done “before the end of the year.” Any McConnell-approved plan would be less than what a Democratic-led Senate would endorse, but markets still expect it to be significant, McMillan said.
That said, investors should beware that a return of a Republican Senate and a Democratic White House could bring back debt-and-spending battles that characterized the final six years of the Obama Administration.
Julian Emanuel, chief equity and derivatives strategist at BTIG warned investors that this is one dynamic that has helped lead to the underperformance of equities by 3.2% per year during divided governments since 1928. ” Nevertheless, the prospect of a GOP Senate majority gridlocking “runaway” spending and capital gains and other tax hikes caused the Nasdaq 100 (NDX) to lead huge equity market upside,” in recent days, he wrote in a note to clients.
Biden has proposed expanding upon the Affordable Care Act by increasing subsidies for individuals who purchase insurance on state-run exchanges and creating a government-run alternative insurance plan that any American could choose to purchase if they are not satisfied with their private plans.
Biden has also proposed allowing Medicare to directly negotiate drug prices, allowing the importation of prescription drugs from abroad and new rules outlawing surprise medical billing.
Preston Caldwell, policy analyst at Morningstar believes Democrats will ultimately have to settle for modest changes to the healthcare system. “I think the degree of the Senate lead matters,” he said, adding that newly elected Democratic senators hail from more moderate states, and will be reluctant to sign on to changes that would destabilize the current system, even if they are able to win a slim majority there.
Others, like Capital Alpha’s Kim Monk and Rob Smith have argued that a public insurance product open to all Americans would be given “substantial market advantages relative to commercial players” that would harm insurance company profits and ultimately lead to lower payments to health care providers.
Of all the incoming president’s policy proposals, his promise to increase taxes on corporations could have the most direct impact on the stock market.
Goldman Sachs estimates that corporate tax hikes and increasing social security taxes on high earners would reduce earnings for the S&P 500 index (SPX) from $188 per share to $171, leading to a 9% decline in the value of the index, if the price-to-earnings ratio remains the same.
But without a Democratic Senate, the chances that corporate tax increases are coming any time soon are effectively zero, and this realization has also given stocks a boost.
Climate Change and Energy
The president elect has proposed an ambitious $2 trillion plan to fight climate change, promising to invest in incentives for power companies to switch to carbon-free sources of energy, auto manufacturers to build more electric vehicles, and to upgrade millions of buildings to make them more energy efficient.
Biden’s goal is to make the power-generation industry produce net-zero emissions by 2035 and for the entire U.S. economy to produce net-zero emissions by 2050, in line with United Nations estimates of what’s needed to stave off the worst effects of climate change.
Biden also said he would push to cut subsidies in the tax code for fossil fuel companies and ban fracking on federal, but not private, land.
What immediate impact these policies could have on the oil and gas industry is uncertain, according to Morningstar’s Caldwell, who said that even an aggressive push to renewables still leaves much demand for fossil fuels in the coming years.
Meanwhile, a Republican Senate would likely block any legislative changes to Democrat-authored climate policy (Republican lawmakers have their own versions that largely include natural gas in a diverse energy mix), though Biden may have significant room to act through EPA regulation.
Meanwhile, the performance of the energy sector is more reliant on global supply and demand dynamics than public policy. Donald Trump’s administration was very friendly to fossil fuel producers, but the S&P 500 energy sector still performed quite poorly over the past four years. Since November of 2016, the Energy Select Sector SPDR Fund (XLE) returned negative 14.8% versus a positive return of 14% for the S&P 500.
The need for greater oversight of large technology companies one of the few issues where there is bipartisan consensus, though disagreement remains over what form it should take.
Whereas Republicans have been critical of social media companies for what they claim is unfair treatment to conservative viewpoints, look for a Biden administration to focus on antitrust and privacy regulation.
Experts say that a Biden administration will likely build on the Trump administration’s antitrust stance toward big tech, exemplified by a recent suit against Google (GOOGL) “Personnel is policy,” said Ed Mills, Washington policy analyst at Raymond James told MarketWatch. “You could see Biden appoint an FTC chairman and a head of the DOJ’s antitrust division who take an even more aggressive stance.”
The president has broad powers to dictate U.S. trade policy, and President Trump used those powers aggressively in his first term to raise tariffs on U.S. importers of Chinese goods and coerce the Chinese into promising to buy more American products.
In February, China agreed to expand its purchase of certain U.S. goods and services by a combined $200 billion during 2020 and 2021, relative to 2017 levels. China has been falling short of its promises, however, meeting just 54% of its targeted purchases, according to the Peterson Institute for International Economics.
Joe Biden once championed China’s accession to the World Trade Organization but has recently argued that the U.S. should join with its allies to “confront China’s abusive behaviors and human rights violations,” in an article in Foreign Affairs earlier this year. Experts say he will likely maintain the Trump tariffs on China, but take a more multilateral approach to confronting China in the future, through consultation with allies.