President-elect Joe Biden: what's next?

As the Covid-19 pandemic widened and the US economy suffered as a consequence, Biden built up a serious lead in the polls ahead of the elections. But with the surprising outcome of the 2016 elections in mind, people were careful not to jump to conclusions. And rightly so. The polls seem to have underestimated the amount of support that Trump continues to enjoy. Eventually, Biden did secure enough electoral votes. Trump has not yet accepted his defeat. He already announced legal steps in key states such as Georgia, Michigan and Pennsylvania. It is therefore likely that short-term uncertainty around the final outcome will remain. Judging from the price action, financial markets do not seem overly concerned with Trump’s legal challenge.

Furthermore, it seems that the much-mentioned ‘blue wave’, where the Democrats would not only win the White House but also both chambers of Congress, still has a small chance to materialize. Two senate seats are still open and will need a run-off to decide who eventually wins. This will take place in January. With a Democratic Congress it will make it easier for Biden to pursue his plans. A split Congress, which will remain divided until the mid-term elections in 2022, makes it more challenging to pass important bills. The most likely outcome is still a divided Congress, which, again based on price action, is the outcome that financial markets are banking on.

Due to the ‘too close to call’ situation, markets have been nervous and volatile. When the most likely outcome became more clear – Biden winning the White House; a divided Congress – equity markets turned positive. The rally was led by health care and technology stocks, as fears on tougher legislation and a reversal of the corporate tax cut diminished. In bond markets, yields on 10-year US Treasuries dropped significantly.

So, how will the outcome of the elections affect investors from now on? Market volatility came down after the results, but can easily emerge again as long as Trump does not accept his defeat. In addition, we think that investors will closely watch Biden’s political plans and his approach to dealing with the corona pandemic. Biden’s policy proposals, including a massive infrastructure bill to accelerate the US economic recovery and to combat climate change, could have positive implications for the equity market. Biden’s plans could have a positive impact on the industrials sector in particular.

Also, US foreign policies are expected to become more predictable. While trade tariffs are unlikely to be removed, Biden will probably aim for a more constructive relationship with China, which would diminish geopolitical uncertainty. Reduced trade tensions can be beneficial to the materials and industrials sectors. With the high possibility of a divided Congress, the prospects of significant policy changes are now lower than previously, which could be positive for healthcare stocks. With regard to the IT sector, possible regulatory hurdles are lifted, but for the energy sector, and possibly the financial sector as well, some regulatory headwinds cannot be ruled out.

Biden’s first priority will most likely be steering the US economy out of the Covid-19 crisis. A split Congress could, on the one hand, make it more difficult for him to implement major stimulus measures. This might at first have a dampening effect on the economic recovery. On the other hand, Biden will also experience difficulties in imposing severe lockdowns, as this is typically decided by State Governors. But in our base case scenario, we eventually expect an economic recovery taking shape in the second quarter of 2021. Therefore, we have turned slightly more positive on equities recently, to a neutral position. We believe investors will likely turn their attention to economic data, the possibility of additional fiscal and monetary stimulus and the development of vaccines. We continue to closely monitor the situation in markets and adjust our investment strategy if necessary. For now, we feel comfortable with our current positioning.

Arthur Boelman - Equity Research & Advisory Expert
Joost Olde Riekerink - Equity Research & Advisory Expert