US Election Reaction and Implications for Investors
- 13 November 2020
- 10 mins reading time
On 9 November we hosted a webinar in which the implications of the US election results were discussed. The content was somewhat speculative because it had to allow for legal challenges being made over the validity of the vote and, perhaps more significantly, the outcome of Georgia’s run-offs to elect its two senators. Nonetheless, we were able to consider Mr. Biden’s ambitions, the reality of what he might be able to achieve and the ramifications for economics and investors.
No blue wave
Anyone who inferred from opinion polls that Mr. Biden would win the presidency and both houses of Congress (the House of Representatives and the Senate) was mistaken. The Democrats’ majority in the House was reduced and the chances of their retaining control of the Senate appear slim. Republicans have already won 50 of the 100 seats in the Senate and only need one of the two Georgia seats that will be decided in the January run-offs to regain control of the upper house.
In essence, it appears that Mr. Biden will have to work much harder to get his most ambitious legislation through that would have led to taxation increases, substantial spending packages and environmentally friendly actions.
He will not be powerless
However, it has become something of a tradition for incoming presidents to sign executive orders on entering the White House. Mr. Biden is likely to use this power to reverse a number of his predecessor’s 140 executive orders. He’s also likely to drop in a few new ones in support of the four priorities that his prospective administration has listed on its website, namely:
The ambitions laid out during the election campaign included providing huge financial support for households and businesses affected by the pandemic to the tune of around $3.5 trillion. Much of this money was earmarked for infrastructure projects with an emphasis on “green” credentials.
These ambitions will have to be watered down according to how much he can agree with Republican Senate leader, Mitch McConnell. Senator McConnell infamously referred to himself as “the Grim Reaper” due to his preventing most Democrat legislation from progressing during Barack Obama’s tenure as president.
However, Senator McConnell has a less fractious relationship with the president-elect than he did with the previous Democrat president. So we might see some legislation eluding the scythe.
So what’s likely?
Firstly, we expect international relations to become more considered and collegiate. Mr. Biden has already indicated his commitment to rejuvenate relations with international organisations such as the World Health Organisation.
This co-operative approach could also be extended to the World Trade Organisation (WTO) which could support the US in its efforts to address concerns over Chinese political and military ambition, as well as its burgeoning international economic power.
In a similar vein, we anticipate that Mr. Biden will seek to renew relations with the European Union, Japan and India. In driving them away from trade with the US, President Trump strengthened their ties with China. We expect a fundamentally different approach from the president-elect.
This has further significance for the UK. The WTO has been relatively impotent of late as the US alone failed to back the organisation’s own president-elect. With US support, the ability of the WTO to operate is reinvigorated. As well as helping to create a platform for considered trade manoeuvres with China, this might also be reassuring for a post-Brexit UK that may have to rely on WTO trade rules.
However, a trade deal between the UK and the US is, we believe, still some way off. Whatever progress had been made under President Trump in this regard, is almost certain to be reviewed in detail by the new US administration and considered within the broader strategic context of improved US relations with the EU.
This brings us to a high priority which is likely to sound very familiar: America first. Mr. Biden might not be as bombastic or anti-establishment as his predecessor, but the near-71 million votes won by President Trump during the election can’t be ignored. Support of US industry and jobs has to be at or near the top of what Mr. Biden clearly pursues.
The new administration has pledged on its website to make efforts to support smaller businesses that have been eclipsed during the pandemic by the success of technology giants such as Amazon and Google. It will be hard for Republicans to resist all such moves now that they will have one eye on the January run-offs in Georgia and the next round of Senate elections in 2022.
By the same token, Republicans will be mindful that a green agenda which simultaneously supports American jobs and economic growth presents an attractive combination to the voting public.
An ideal outcome?
The reaction to all of this among market-participants intimated a sense of relief that a fairly clear result had been achieved, but without affording the Democrats the ability to impose substantial new tax burdens and regulatory responsibilities that might have hit corporate profits.
As a result, the response among investors and analysts was generally positive. Investors moved money out of lower-risk rated investments such as government bonds, and into ones with higher levels of risk and potential return, such as company shares. That sent the demand for and prices of government bonds down, while the S&P 500 and FTSE All Share stock indices rose.
And then the news came that put the whole political show into perspective: a test-vaccine was revealed to have had a 90% success rate over thousands of cases. Stock prices rocketed with investors accelerating their moves from bonds into stocks reflecting a near-euphoric hope that the world might finally be emerging from one of the worst-ever economic downturns.
When it comes to economics and investments, there’s more to life than politics.
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