US election aftermath: ‘Bidenomics’
Financial market events
Investors are now focussed on what a Joe Biden victory means for the US economy, the broader global economy and financial markets.
US Presidential elections are periods of uncertainty, potentially affecting investors, businesses and consumers decision-making.
What does it all mean?
• US President Donald Trump has so far refused to concede defeat in the November 3 presidential election. Major US media outlets have awarded Democratic Party President-elect Joe Biden 306 US Electoral College votes – well above the 270 seat threshold required to get the keys to the White House.
• Despite the Trump campaign most recently seeking a partial recount of votes in Wisconsin and Georgia, political strategists are increasingly confident that Mr. Biden’s lead across several crucial battleground states is large enough to withstand any vote recount or legal challenge from Mr. Trump. In fact, the Trump campaign is in a race-against-time as electoral authorities in Georgia certified its results on Friday. Michigan and Pennsylvania are also expected to certify their results today after a federal judge threw out a lawsuit to block certification of the state’s election due to a “startling” lack of evidence. And Nevada, Arizona and Wisconsin could certify their election results by December 1.
• But a Democratic Party ‘clean sweep’ of the White House and Congress appears unlikely after the Republican Party were awarded 50 seats in the Senate with the Democrats still needing two seats in Georgia’s run-off elections on January 5 to split control. At the moment, betting markets put a 25 per cent probability on that outcome.
• That said, Wall Street investors appear unfazed by the prospect of a divided Congress as a Biden presidency could ease trade tensions with China, while a probable Republican Senate majority would likely block Mr. Biden’s proposed tax increases and anti-trust regulatory policies.
• President-elect Biden has already moved ahead with transition plans ahead of his expected inauguration in late January, holding a virtual roundtable with frontline health care workers as US COVID-19 cases and hospitalisations both surge. In fact, the US added a record 195,690 virus cases on Friday with total infections surpassing 12 million, according to Johns Hopkins University. Virus restrictions have been announced in Los Angeles, New York City and Chicago. That said, the head of the US government’s ‘Operation Warp Speed’ said yesterday that vaccinations in the US will “hopefully start on the 11th or 12th of December.”
• So what can we expect from ‘Bidenomics’? Mr. Biden’s presidential pitch focused on several key policy platforms which could usher in a significant shift in America’s economic and social policies, including (source: www.joebiden.com):
(1) COVID-19 response: Provide universal free testing with at least ten testing centres in every US state, supported by the addition of 100,000 health workers.
(2) Jobs, wages and industry: Called the “Build Back Better” plan, Mr. Biden supports the extension of small business loans and direct government payments to families. Biden is proposing an additional US$200 in social security payments per month and supports raising the minimum federal wage to US$15 an hour. He has also called for US$400 billion to fund a “Buy American” program alongside a US$300 billion investment in US-made materials, services, research and technology.
(3) Taxation: Mr. Biden is keen to redistribute income through the taxation system and rescind the Trump tax cuts. He wants corporations and high net worth individuals to pay “their fair share” and has proposed increasing top income tax rates, along with ‘tax base broadeners’, such as eliminating or limiting various incentives currently available to these taxpayers.
A Biden Administration would immediately dismantle the Tax Cuts and Jobs Act by increasing the corporate tax rate to 28 per cent (by reversing half of Trump’s cuts), return the top marginal tax rate to 39.6 per cent (from 37 per cent) and tax capital gains and dividends as ordinary income. Profits earned by foreign subsidies of US firms would be doubled to 21 per cent and small business income deductions above US$400,000 would be phased-out. A financial risk fee would be imposed on large banks. If elected, tax credits would be provided to first homebuyers, renters and for childcare. The cost is estimated at US$3-4 trillion over the next decade.
(4) Health and education: President-elect Biden supports universal pre-school, the expansion of tuition-free colleges and US$10,000 student loan debt ‘forgiveness’. And ‘Obamacare’ would be expanded with a plan to insure 97 per cent of all Americans with the plan estimated to cost US$2.3 trillion over 10 years.
(5) Immigration: Mr. Biden has promised to protect ‘Dreamers’ – people brought to the US illegally as children – as well as rescind limits on asylum seekers and travel bans on some Islamic countries.
(6) Climate change and energy policy: Mr. Biden is proposing US$1.7 trillion federal investment in green technologies research; wants the US to reach net zero emissions by 2050 and says the US will re-join the Paris Climate Accord. He also wants a US$2 trillion investment in green energy. Vice president-elect. Kamala Harris, was a co-sponsor of the Green New Deal, a policy paper that advocates overhauling the US economy to tackle climate change.
(7) International trade: President-elect Biden is expected to take a multilateral approach, enlisting allies and partners in a bid to achieve US trade and economic goals. As President, Biden wants to rebuild strained relations with the EU and work with the World Trade Organisation (WTO) to address unfair trade practices. As mentioned above, Biden’s economic plan includes a US$400 billion plan to buy American-made goods and reduce US reliance on critical products – such as medicine and personal protective equipment – from China. He would prefer to rally allies against “commercial abuses” by China instead of raising tariffs.
(8) Infrastructure: So far Mr. Biden has announced a US$2 trillion building plan – part funded by higher corporate tax rates – to rebuild roads and bridges, increased spending on mass transit and high speed rail network, investing in 5G wireless internet and rural broadband networks.
What does it mean for investors?
• So what’s next? On December 8, all US states are scheduled to appoint electors with ‘safe harbour’ status – when Congress presumes all results have been certified and valid. Then on December 23, US Vice president-elect Kamala Harris is expected to receive elector’s ballots. Then on January 6 – after the Georgia Senate runoff on January 5 – Congress meets to tally the results from each state. The inauguration of the President-elect occurs on January 20.
• How have financial markets reacted so far? US sharemarkets rallied to record highs in the aftermath of the US election. Elsewhere, European and Aussie sharemarkets have touched nine-month highs.
• With the much-feared contested US election outcome now unlikely – given Mr. Biden’s commanding Electoral College lead – investors have moved on from the election.
• Attention is now firmly fixed on the economic and health implications of the pandemic with a ‘second wave’ of the virus gripping Europe and the US. Partial and full lockdowns have already been announced, unnerving investors concerned about a potential ‘double-dip’ recession.
• That said, promising COVID-19 vaccine trials – with 95 per cent efficacy – have boosted investor sentiment. Expectations of a vaccine rollout by mid-2021 is growing, boosting hopes of an end to the pandemic, strengthening the economic and corporate recovery in 2021.
• With US Congress now in recess ahead of the Thanksgiving Day holiday on Thursday, emergency fiscal measures totalling around US$500-US$700 billion could be announced by year-end. But investors will be hoping that US President-elect Biden announces an additional stimulus package of at least US$1 trillion, which could boost US economic growth, returning the economy to pre-pandemic levels by the end of 2021. But the Republican-led Senate could oppose a large increase in government spending with gridlock a likely feature on Capitol Hill over the next two years.
• Already outgoing US Treasury Secretary Steven Mnuchin has announced plans to end several US Federal Reserve facilities that bought corporate bonds as well as the Main Street Lending Program targeted towards small- and medium-sized businesses. The move has incurred the ire of the US central bank with policymakers suggesting the programs serve an important role to support the US economy.
• As President, Joe Biden could also feature tougher financial regulation and the imposition of anti-trust measures on big technology companies. In a development that will concern Wall Street, Mr. Biden’s agency review team already includes Obama-era regulator Gary Gensler, who was most aggressive in implementing the Dodd-Frank financial reform law following the Global Financial Crisis. And Democratic Senator Elizabeth Warren, now a key voice on financial regulatory issues, opposed US Federal Reserve Chairman Jerome Powell’s nomination in 2018. Mr. Powell’s term expires in February 2022.
• Monetary policy will be left to the independent US Federal Reserve. But the possible nomination of current Fed Governor Dr Lael Brainard to the pivotal US Treasury Secretary position could see a more complementary monetary and fiscal policy agenda under a Biden Administration.
• Mr. Biden’s engagement with China on trade issues will also be a key focus along with his foreign policy objectives in the Middle East. The multi-year Trump trade war has soured US-China relations, creating uncertainty for businesses and financial markets.
• Finally, the most pressing domestic policy focus at the beginning of a Biden presidency is the pandemic. From an economic policy standpoint some believed that there was an immediate risk that he may impose nationwide lockdowns to slow the spread of the coronavirus, stalling the US economic recovery. President-elect Biden has ruled this out: “I’m going to shut down the virus, that’s what I’m going to shut down. I’ll say it again: No national shutdown. No national shutdown”.
• But supressing and containing the virus could be the hallmark of a Biden presidency – the primary reason why he defeated Mr. Trump – the first incumbent president to lose office since 1992.
Published by Ryan Felsman, Senior Economist, CommSec