Highlights:
· Joe Biden was elected the 46th president of the United States in November. He took office at a severe point in the COVID-19 pandemic and with the country as divided as ever, but with Democratic control of both houses of Congress.
· Equity markets have historically been relatively indifferent to politics. On the other hand, staying invested regardless of who has control of the White House and Congress has been critical.
· There is likely to be a direct correlation between how quickly and widely the Biden administration can administer the vaccine and the strength of the economy in 2021. To date, equity markets seem to be pricing in a reasonably efficient vaccine administration process coupled with additional fiscal stimulus and accommodating monetary policy.
Commentary:
In a hotly contested election, Joe Biden was elected as the 46th president of the United States during the quarter. This result made Donald Trump the first incumbent president in nearly three decades to not win reelection. President Biden campaigned on the promise of national unity and healing to combat the ongoing COVID-19 pandemic and resulting economic crisis. In his successful third attempt at the presidency, President Biden takes office with the country as divided as ever, which will test his principal theory of governance that compromise is good and modest progress is still progress. He will be doing so with control of both houses of Congress after the Democrats’ recent victories in both Senate runoffs in Georgia.
A Senate majority should enable the Biden administration to pass budget bills, confirm judges, decide which bills come up for a vote (due to Chuck Schumer replacing Mitch McConnell as Senate majority leader), enact the COVID-19 policies they favor to slow the pandemic, enact tougher regulation on Wall Street and the energy industry, and raise taxes on the rich. History has shown that equity markets tend to go up regardless of which party controls Washington. From 1929 through 2019, one party controlled both chambers of Congress and the presidency 45 times and the S&P 500 rose an average of 7.45% during those years. In the other 46 years when there was a split government, the index climbed 7.26% on average.
Policy decisions and regulatory environment are only a few among a long list of factors that influence the economy and equity markets. The long-term nature of the investment policy we espouse does not rely on short-term market developments, but rather on economic growth, productivity and innovation, and most importantly of all, on being invested in the equity markets for the long-term. Certainly, from a market return perspective, there is no significant statistical advantage which can be gleaned from one party’s control of the presidency or congress.
This is because much of the economy’s performance is beyond the control of a president or congress. This can be easy to lose sight of when politics tend to dominate headlines leading up to and immediately after election seasons. President Trump had the good fortune to take office when the labor market had become tight enough after a decade of economic growth that employers were increasing pay quicker than inflation was rising. President Obama took office on the heels of the Great Recession. President Biden took office in the midst of a global pandemic coupled with equity markets at or near all-time highs. This might result in an uphill battle for the Biden administration at the outset, but longer term there is reason to hope that the next economic recovery, whenever it comes, will be stronger than the weak recovery seen in the years immediately following the 2007-2009 financial crisis. After that crisis, many households were coping with large debts. Today, household balance sheets are in better shape in general, and President Biden seems intent on keeping it that way based on his initial proposals for additional fiscal stimulus. Furthermore, once the vaccine is widely distributed, many Americans will very likely be feeling a pent-up urge to spend on travel, entertainment, dining out and all the other things that have been put on hold during this pandemic.
There are two very different COVID-19 stories unfolding. The first story shows a light at the end of the tunnel as multiple vaccines have been approved and administration to the highest risk individuals and essential workers has begun. All the while, virus treatment continues to improve, and the death rate continues to decline. Unfortunately, the second story shows that the virus is still winning due to new variants of the coronavirus coupled with a public that is growing weary of virus-induced restrictions and increasingly willing to risk its dangers. Worldwide this has led to the virus spreading more rapidly than at any other point since the outbreak began early last year and straining hospitals. While much of Europe has taken harsh measures such as again shutting some restaurants or banning indoor gatherings, President Trump opposed taking these steps. President Biden has emphasized that he will base his policy on scientists’ advice, which is likely to help combat the spread of the virus, but might provide a headwind for the economy until the vaccine has been sufficiently administered to result in herd immunity.
China’s economy grew nearly as fast this summer as before the pandemic, showing that a fast economic rebound is possible when the virus is under control. However, even a highly effective vaccine will not lead to stronger economic growth overnight. Fortunately, congress recently approved a $900 billion stimulus package. While this stimulus plan is not nearly as large as the one that was passed in the spring, there is optimism that it is big enough to keep the economy from falling into a new recession in the early part of 2021 before the vaccine has been distributed widely enough and the economy can begin to more broadly open. President Biden is also touting an additional $1.9 trillion stimulus package, which even if partially approved, should provide some shelter from a recessionary environment.
Additional fiscal stimulus will continue to be supported in tandem by accommodating monetary policy. The Federal Reserve doubled down on its commitment to support the U.S. economy, promising to maintain its massive asset purchase program until it sees “substantial further progress” in employment and inflation. Elsewhere, the European Central Bank (ECB) scaled up its emergency bond-buying program by more than a third and unveiled a new batch of ultra cheap loans for banks. Together with a new €750 billion joint fund signed off on by European Union leaders during the quarter, Europe is showing its willingness to combat the pandemic-induced economic downturn using new debt. This is a full turn in strategy from the region’s debt crisis a decade ago, when many European governments instead pursued austerity measures that hindered their economies’ ability to recover from the great financial recession.
Additional fiscal stimulus seems to be coming at a good time with household spending showing signs of slowing down after a shopping spree this summer and household incomes being pressured by elevated unemployment rates due to a surge in virus cases that prompted many states and cities to re-impose restrictions on business and social gatherings not seen since the spring. Nearly 10 million fewer Americans have jobs today than a year ago. Accordingly, it is reasonable to believe that financial conditions will remain loose, credit spreads low, and access to capital plentiful for the near future.
A new year usually brings surprises in one form or another although we hope the 2021 variety is more muted than the 2020 blend. Nevertheless, we believe successful investing revolves around having a portfolio that is properly balanced and diversified based on anticipated withdrawal requirements that are identified through a comprehensive financial planning process. An investment policy developed in this manner is intended to avoid market timing and stay the course through unexpected events such as the coronavirus pandemic that we are currently experiencing. To quote legendary investor Jack Bogle, “Your success in investing will depend in part on your character and guts and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.”
Urban Financial Advisory Corporation – January 2021