President Biden has reached his first milestone, 100 days in office. What has this time told us about who he will be as president and how his policies might impact markets?
Using History as his North Star
The Biden administration came into office with one clear priority: addressing the Covid-19 economic and health crisis. After setting up a task force to accelerate vaccinations, the focus quickly turned to the next relief package. While he ran for president on a platform promising to unify partisan America and Congress, he pushed his Covid relief package through knowing he had no support from Republicans. This was an about-face from his campaign promise. However, he viewed this bill as emergency funding, and his experience as vice president taught him it was not worth waiting for Republican support since their counterproposal was a quarter of what he wanted. When he was vice president under Obama, they spent months trying to negotiate with the Republicans on the Affordable Care Act, and in the end, they did not get a single Republican vote. Therefore, he decided to go forward with only Democratic support, feeling that urgency and scale was more important than bipartisanship.
Now, infrastructure. Biden says he wants to go forward with Republican support, but is this possible? The first infrastructure bill has another price tag over USD2 trillion. It calls for corporate taxes to help pay for it. The Republicans’ counterproposal is only USD600 billion and is focused on “traditional” infrastructure such as bridges, roads, airports, broadband, and the electrical grid. It removes over USD1 trillion in “softer” infrastructure. The Republican plan proposes using user fees, repurposed Covid-19 relief funds and zero tax hikes. While most Democrats surely scoffed at the plan, President Biden said it is a “legitimate starting point,” though it probably still will not lead to a bipartisan package. President Biden will also introduce a second bill to cover social infrastructure – using individual and other industry tax hikes to pay for it. He knows he will garner no Republican support, with the Democrats already prepared to use reconciliation to move it through.
We also have seen Biden take his policies further to the left than what his 36-year track record in the Senate showed us. Is it because he is pandering to the progressive wing of the party? Or is it more a sign of the times? Only time will tell, but it is conceivable that he feels he is seizing a historic opportunity.
Making Landmark Moves
Biden took office during the worst pandemic in 100 years. In the past century, only a few new presidents have had such a big crisis to overcome – Hoover and FDR in the wake of the Great Depression, Lyndon B. Johnson with the civil rights movement and the assassinations of John F. Kennedy and Martin Luther King, and Ronald Reagan coming off historic high inflation, interest rates and global unrest. All three are considered landmark presidents. Biden wants to be the next. He sees the opportunity to conquer not only the health crisis, but to also put an end to racial injustice and income inequality.
On this, Biden is aligned with US Treasury Secretary Janet Yellen and Fed Chair Jerome Powell in their mission to “fix” (at least improve) inequality, which is perceived to have further worsened during the pandemic. Indeed, the Fed has already highlighted that the labor market was a bigger focus than inflation. And it is not just about unemployment. It is about minority, lower wage, and less educated employment rates. With this alignment, policies should build on each other to address these issues. We therefore expect ongoing spending, accommodative monetary policy, and very strong economic growth.
There are questions about the size that the US deficit might reach, what this could do to the US dollar and US interest rates. But for now, sentiment is supported by (much) stronger growth prospects. In terms of potential tax hikes, Biden will probably not manage everything he has mentioned. That said, there is still headline risk potential for equity markets. Estimates on the hit to earnings per share (EPS) would be about 8%–9%, though the expected watered-down version of the bill would likely only shave off 5% EPS, suggesting a milder actual impact.
“Tough on China” is Here to Stay
One of the expectations when President Biden won the election was that US-China relations would dramatically improve from the Trump era. However, we have seen only little, if any, détente since Biden took office. Indeed, there is a broad-based view across the administration, as well as Congress, that the US-China relationship will be the biggest determinant of global affairs for the coming decades. As such, maintaining pressure on a strategic adversary remains a priority, suggesting the relations will only marginally improve. Yes, the new administration is likely to come to a more stable modus operandi with China, but the relationship will remain tense.
To some extent, Biden is stuck with some of Trump’s policies, as removing them would make him look soft on China and Democrats view China as a threat just as much as the Republicans do. Indeed, while we expected some time to go by, there has been no talk of removing the Trump-imposed tariffs. Admittedly, though, it might be convenient for Biden to have the residual leverage, to score a “win” in exchange for any easing, or to remove them only if it’s in the US economy’s interest.
President Biden is hard at work repairing relationships in the South China Sea – such as with Japan – and is aiming to build an alliance of countries to barrage against China’s ascent. There is also work to slow China’s expansion elsewhere, such as Africa and around strategic investments like commodities. Moreover, human rights are a key focus of the administration and are likely to lead to further feuds.
Of course, the main source of tension will remain the technology sector, where the US advantage is most at risk. For example, China is working hard to reduce dependency on semiconductors – an issue the US and Japan are in alignment on. There is also congressional bipartisan agreement on the subject and a number of bills have been introduced. They range from enhancing US expertise, to export controls, and banning trading of Chinese companies on US stock exchanges that do not align with US auditing requirements. But the actual outcome of these proposals is likely to be milder than recent headlines suggest.
In this context, we believe that headline risk remains for markets, but we do not anticipate a sharp deterioration between sides nor an escalation of tensions that could lead to a sharp or protracted correction. Conversely, improvements might be hard to come by.
Walking the Green Talk
President Biden has put climate risk at the top of his agenda – announcing plans to halve US greenhouse emissions by 2030. While it was to be assumed he would tackle this issue, he announced a landmark Executive Order (EO) titled “Climate Related Financial Risk” that directs agencies to disclose their climate risks by working with White House economic and climate advisors and Office of Management and Budget to monitor and measure these risks. Inevitably, climate-related regulation is coming for all industries, including financial services. Here again, we see an alignment with the Fed, despite its independence, as it began work last year on climate and has established two internal groups to address the problem. One group will look at individual bank risk and the other will look at the potential risks facing the greater financial system.
As mentioned, President Biden’s infrastructure plans are focused on a green revolution. Given the risk that the Democrats may lose their majority in Congress at the 2022 midterm elections, they may forgo Republican support and move forward with one combined package via reconciliation. This would ensure the key priorities are passed, especially on the “social infrastructure” side.
While this focus on climate might suggest an alignment with Europe, where climate policies have grown much faster than in the US, some tensions could also come as a result. Indeed, in both cases, the focus is on a domestic revival, on protecting and enhancing local industries, which could come at the cost of cross-Atlantic relations. This could also lead to further tensions with China. With China’s 2060 green goals, many have dubbed this a “climate race” with the US. The US remains skeptical of China’s approach, since “bad” practices continue through the Belt and Road Initiative. More importantly, there is a race for leadership with climate goals between the two countries and a view that neither is being driven by the other.
For investors, though, one thing is clear: Responsible investing should only benefit from these moves, which will likely lead to large subsidies, support, and regulation towards a greener future.
President Biden entered office with robust plans to overcome the Covid-19 economic and health crisis, improve foreign relations, and tackle climate change. In 100 days, he has already taken bold actions. We can look at this as the blueprint for his four-year term. However, in our view, it is more of a measure of his next two years in office, pre-midterms. His quick pace and large-scale decisions have been possible because he has a Democratic-controlled House and Senate, which allows him to pass his agenda on partisan lines. However, the speed with which he is moving these bills has more to do with the potential shift of political control after the 2022 midterm elections. Using history as a guide, midterm elections of a first-term president typically give substantial wins to the opposing party – in this case the Republicans. In a country deeply divided in partisan politics, Biden’s agenda could stall if Democrats lose their majority.
In the meantime, the current policy mix is setting up a strong growth outlook for the US and a constructive backdrop for risk assets. Admittedly, there are concerns about inflation with so much fiscal spending, but we do not expect it to spiral, given ongoing slack in the labor market. As such, the Fed should be able to remain accommodative and markets should enjoy the tailwinds, especially with swift vaccination and rebounding earnings.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.