November 12, 2020 | By Victor Zhang
The tide has gone out on the U.S. presidential election’s blue wave scenario. If Joe Biden’s victory withstands legal challenges, he will assume the presidency with a Democratic majority in the House of Representatives and a yet to be determined power structure in the Senate. This likely takes a “policy revolution” off the table, but he can still drive change.
Global equity markets have taken the outcome in stride. But we know markets don’t react well to uncertainty, so we should be prepared for volatility if any of President Donald Trump’s election challenges gain traction.
Control of the Senate also is unknown. Runoff elections to determine Georgia's Senate seats on Jan. 5, 2021, will determine the balance of power with the potential for a 50/50 split and Vice President Kamala Harris serving as the tie breaker. Democrats maintained their House majority, though it is diminished.
Even with these unknowns, we’re now in a better position to look more closely at what a Biden presidency might mean.
Though working across the aisle sounds daunting in a hyperpartisan environment, Biden has decades of experience in the Senate and has pledged to work with Republicans on Capitol Hill. Failing that, he won’t be powerless to pursue his agenda. Passing significant pieces of legislation will be difficult, but as Trump has demonstrated, executive orders, cabinet department staffing and the authority to pull the levers of government are powerful tools for shaping policy.
If negotiators can’t work out a deal before Trump leaves office, one of Biden’s first tasks will be brokering a stimulus package. A deal is likely, but we believe the size and scope will be much smaller than the one that would have been struck with solid Democratic majorities in both houses of Congress. The greater likelihood of scaled-back spending helps explain the post-election underperformance of cyclical stocks that would have benefited from a larger deal.
Biden’s proposals to raise taxes on corporations and high-earning individuals aren’t likely to come to fruition. This removes a potentially significant headwind to corporate profits and economic growth.
While his ability to expand coverage under the Affordable Care Act (ACA) will be limited, Biden will end further federal efforts to weaken it. We believe the ACA is positive for many corners of the health care sector since broader insurance coverage results in more people seeking care and saddles providers with fewer uncollectible bills. Republicans and Democrats share some common ground on drug prices, so price controls remain a risk for pharmaceutical companies.
Tech companies face a lessened threat of higher taxes, but the risk of tougher antitrust enforcement remains. There’s also the potential for regulatory pressure related to privacy issues and the treatment of gig economy workers. On the positive side, Biden supports electric vehicles, 5G technology and artificial intelligence. He may loosen Trump administration immigration policies that tech companies believe hamper their ability to recruit the best talent from around the globe.
The Biden administration’s view of regulating businesses will diverge from that of the Trump White House. The energy and financials sectors provide good examples. Biden is an advocate for the U.S achieving net zero greenhouse gas emissions by 2050, so we expect a tougher stance on fossil fuels and more support for electric vehicles and alternative energy. The financials sector is another area that could face greater scrutiny after seeing an easing of some regulatory burdens under Trump’s watch. This could include restoring certain provisions of the Dodd-Frank Act implemented following the 2008 financial crisis.
Biden has some protectionist tendencies. But he has pledged to repair relationships with traditional U.S. allies and work jointly to convince China to change its practices.1 Importantly, a Biden presidency removes some uncertainty from trade discussions because we expect that he’ll bring a more stable and predictable approach to the negotiating table. He also has indicated a desire to use trade policy as leverage with China to gain its cooperation on global climate initiatives.
As investors, we view election results and government policy as inputs rather than drivers of our decision-making. Some companies manage through legislative and regulatory hurdles better than others even within seemingly politically advantaged or disadvantaged industries.
Beyond any near-term upheaval from this election, every company’s task—and ours—is made even more difficult by the pandemic’s uncertain path and progress in the discovery and delivery of treatments and vaccines. As we build our portfolios, we’ll be evaluating companies and management teams based on their ability to navigate this complex landscape.
1Oxford Economic Research Briefing, October 21, 2020.
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