Amid the noise and vitriol of the US Presidential race, there is some positive news for the forces that impact markets moves: trade relationships, companies, government spending and controlling COVID-19.
On the surface, you might have expected markets to be more nervous about a Biden victory. His headline policies are reform focused and include some tax hikes for companies with operations in the US. Furthermore, though the results are not clear yet, the Senate will be hostile for Biden, at a very critical point in its history and especially given the current economic climate.
However, a deeper dive shows – as we’ve come to expect this year! – it’s not as simple as it seems. Actually, there’s every chance this is a strong outcome for markets in the short term as we have already seen – we could have a US President who won’t have a landslide of support for disrupting the status quo, but is likely to have support for more bi-partisan measures such as stimulus packages.
I detailed Biden’s plans and risks in a recent note – and it’s worth pointing out that there is potential for market volatility eg if its ultimately confirmed that there will be Senate gridlock, as we saw in the Obama years. For now, here are some key points to consider about the President elect, and how his term in office could play out:
- Biden’s proposed tax hikes are extremely unlikely to pass into law given blockage from the Senate. Biden plans to raise the corporate tax rate to 28% (reversing half of Trump’s cut to 21%), return the top marginal tax rate to 39.6% (from 37%) and tax capital gains and dividends as ordinary income. It’s fair to assume companies and investors would welcome a delay, or blockage, of those hikes.
- Some form of fiscal stimulus is likely to be agreed, with Senate Majority Leader Mitch McConnell saying after the election that, “I think we need do it.”, It could come before the end of the year while Trump is still President but is likely to be smaller at, for example, $US1.5 trillion rather than, for example, $3 trillion had the Democrats won the Senate as well.
- Biden and McConnell already have a strong working relationship so may be able to get something done on infrastructure spending and other Democrat spending priorities around health care and education. There may be some incentive for Senate Republicans to cut a deal with Democrats if they can make Trump’s corporate tax cuts (most of which expire in 2025) permanent.
- The Senate is likely to limit what Biden can do on climate policy where spending and tax measures are required, but a lot can still be achieved by regulation of the energy sector and the US will likely re-enter the Paris Climate Agreement.
- Biden is likely to re-engage and strengthen relationships with traditional US allies and international bodies like the WHO and WTO. The US is also likely to re-enter the Trans-Pacific Partnership (now CPTPP) and the Iran Nuclear Deal.
- Trade wars are likely to be toned down with the US relying on a more diplomatic approach working with US allies to resolve trade differences with China, using the prospect of cutting Trump’s tariffs as leverage. This doesn’t mean that Biden will be “soft on China” just that a different approach will be used to address US grievances. Trade tensions with China and the US is something markets have been watching and reacting to.
- A Biden presidency is likely to take a more expert based approach to controlling COVID-19 ahead of the full deployment of vaccines. This could involve a more coordinated approach and partial lockdowns in the short term, eventually leading to more confident reopenings.
- Biden will seek to heal divisions and unify the US that was inflamed by President Trump. This may be helped by having Kamala Harris as Vice President who may very well be the Democrat nominee for President in 2024. He will also support the rule of law and reinforce US institutions that have served it well.
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