What does President Biden mean for the financial markets?

The fog left in the wake of the recent US elections is clearing gradually, raising the question of what President-elect Joe Biden and his policy agenda mean for the outlook on the financial markets. Their impacts, to put it succinctly, are likely to be on the mild side.

 

Presidential tweets set to become a scarce commodity

Over the last nearly four years, Donald Trump has fired off around 200 tweets on the stock market from the Oval Office, usually when share prices were rallying or new records were broken. But every now and then his tweets also caused stock prices to plunge momentarily, for instance whenever the trade war with China flared anew. Compared to the Twitter antics of President Trump, things look set to get relatively boring for stock-market participants under President-elect Joe Biden. He is unlikely to regularly send tweets commenting on the state of the Dow Jones index, nor is he likely to further tighten the screw on import tariffs. Since the president of the United States has a relatively large degree of latitude in shaping and steering foreign policy, relations with the USA’s trading partners are one policy area where Biden may put investors at ease, because the tit-for-tat slugfest with China has in fact taken a significant toll on US corporate earnings. Even a partial rollback of the reciprocally imposed tariffs would noticeably lift the bottom lines of corporate income statements and would send a positive signal to the equity market.

 

Green wave

Bull market in renewable energy

Share-price performance of Invesco Solar ETF

Sources: Bloomberg, Kaiser Partner Privatbank

 

Gridlock – everything to stay the same?

And in other policy areas as well, a disruption unleashed in the style of Trump, who slashed the corporate tax rate (from 35% to 21%) upon taking office and ignited a banner year for stocks in 2017, looks very unlikely under the most probable political scenario today, which foresees a continued divided balance of power in the US Congress and thus no upswell of the hoped-for (or feared) “blue wave.” It’s true, though, that the state of Georgia is still scheduled to hold two run-off elections between Democratic and Republican senatorial candidates in January. If the Democrats win both seats, they would deadlock the Senate and effectively take control of the upper house. However, betting markets currently give the Democrats only a one-in-three probability of winning both of Georgia’s Senate seats. So, it looks as though political gridlock might prevail in Washington D.C. for at least two more years. Without Democratic control of Congress, Joe Biden would have to scrap or dial down many elements of his policy agenda. A bill to raise corporate taxes would be just as much off the table as a bill to raise the federal minimum wage to USD 15 per hour. In a gridlock scenario, the earnings of publicly traded companies – a key influencing factor for stock valuations – are likely to remain largely unaffected by politics in general. Stock traders will no doubt enjoy hearing those tidings.

 

A green instead of blue wave

The healthcare industry, too, can probably live easily with a stalemate in Congress. Political steps to cut drug prices and to reduce the high market concentration in the healthcare sector appear to be off the table for now. In the near term, the healthcare industry may actually even benefit from stepped-up investments in medical technology and personal protective equipment, in large part due to the COVID-19 pandemic. The IT industry (or at least some of its spokesmen from Silicon Valley) has already taken the precaution of cozying up to Democrats in recent weeks. Under the Biden administration, the IT sector is arguably unlikely to fare worse than it has during the past several months, in which big tech names like Amazon, Google et al. have already been facing more critical scrutiny than before. In any case, going the extreme route of breaking up the tech titans appears to be ruled out, and the internet giants could certainly live with merely having to pay settlements or fines.

Investors have already largely priced in the future “green wave” scenario.

 

Producers and equipment suppliers in the alternative energy sector are also likely to get along well with President Joe Biden and earn a good livelihood. Biden has already publicly vowed to correct his predecessor’s blunder and rejoin the Paris climate accord in January 2021, and his administration appears intent on delivering on those headlines afterwards. It says it intends to transition the USA to climate neutrality by 2050 and to invest USD 2 trillion in the development of renewable energy over the next ten years. Investors, as so often happens, have already largely priced in the future “green wave” scenario. So much so, in fact, that one ETF focused on solar energy stocks, for example, has seen its share price surge by a third since the US elections and soar by around 200% year-to-date.

 

Oliver Hackel, CFA Macro and Investment Strategy, Behavioral Finance and Technical Analysis

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