Election update – The Biden presidency
Commentary as of November 09, 2020
Market overview. With the elections mostly decided and news of a possible breakthrough on the vaccine front, the market is clearly enjoying a classic risk-on environment as the uncertainty that surrounded the elections has begun to fade. Although the runoff elections for the two U.S. Senate seats from Georgia could still swing the Senate from Republican to Democrat-control, the risk of a blue wave and the higher taxes that might have accompanied it have clearly fallen. While there may be false starts on the road to a vaccine for COVID-19, we believe that falling uncertainty will continue to be a tailwind for the markets.
Third quarter earnings results have been broadly positive, and the market continues to expect a full recovery in earnings in 2021. S&P 500 Index earnings estimates for 2021 are at $167, just slightly above where they were in 2019, after an expected 20% hit to earnings in 2020. With the market trading on a multiple of 21 times forward earnings, we believe this is a rational number as it reflects not only the areas of the market that have had strong earnings during the pandemic, but also many underearning cyclical businesses that have been hard hit by the downturn and could be poised to benefit from a move towards reopening.
COVID-19 cases accelerating, growth set to slow. Recent weeks have seen skyrocketing COVID-19 cases across Europe and in several U.S. states. Some European countries have been forced to reinstitute lockdowns as the spiking case counts have once again strained healthcare systems.
Hospitalizations are starting to move higher in the U.S., and we are beginning to see early indications that the surge in cases is negatively impacting economic activity. Recent U.S. credit card data has shown a decrease in spending in counties with large increases in COVID-19 case counts and restaurant bookings are beginning to decline. Local governments also are beginning to impose restrictions on gatherings and dining. While we believe the U.S. has a higher tolerance for coronavirus cases than Europe, the risk of lockdowns here in the U.S. is on the rise. Although we do not foresee a broad national lockdown, we could see more targeted shutdowns at the state and local levels. These factors lead us to believe that economic growth could likely slow over the next month or so.
Even as we expect a slowdown due to this newest wave of virus cases, we are still very positive on the economic rebound after we get through the next few months. As evidenced by the vaccine efficacy announcement by Pfizer, Inc., we continue to see progress on therapeutics and vaccines that could help us get back to a more normal economy and way of life. As this occurs, we believe the public will be anxious to engage in economic activity that they are prevented from engaging in now, and this pent-up demand will help fuel the economy as we move through 2021.
Election recap and political outlook. Former Vice-President Joe Biden has been declared President-elect. As we expected, the Democrats have maintained control of the House of Representatives, but with a surprisingly narrowed majority. The real surprise for those expecting a blue wave was in the Senate. As it stands now, the Democrats and the Republicans each have 48 seats. Vote counting continues in races in Alaska and North Carolina, but both are expected to remain in the GOP column. Both Senate races in Georgia will go to a runoff on Jan. 5, with the Republicans needing to win just one of the two seats to maintain control of the Senate. We expect at least one and probably both of those seats will stay Republican, as independent voters may vote for the GOP candidates to serve as a check on agenda of President-elect Biden and the Democrats in the House.
We still expect a fiscal stimulus package to be passed by Congress, although divided government means the package will not be as large as it would have been in a blue wave scenario. With the Senate Republicans having offered $500 billion and the House Democrats seeking $2 trillion, we think they will agree to a deal around $1 trillion, which is about 5% of gross domestic product.
Senate Majority Leader Mitch McConnell has said he would be willing to negotiate a stimulus package during the lame duck session of Congress and would be open to including aid to state and local governments, a key demand of the Democrats. We also believe the bill could contain additional unemployment benefits, more money for small businesses via the Payroll Protection Plan and funding for airlines, as well as money to continue to fight the pandemic. Additional stimulus could be combined with a bill to fund the government, as the current continuing budget resolution expires on Dec. 11.
Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Nov. 09, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
Risk factors: Investing involves risk and the potential to lose principal. Fixed-income securities are subject to interest rate risk and, as such, the value of such securities may fall as interest rates rise. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.
The S&P 500® Index is a float-adjusted market capitalization weighted index that measures the large-capitalization of the U.S. equity market. It is not possible to invest directly in an index.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.