While the election is still not certified, and court battles will drag on, it appears that we can draw two firm conclusions from the 2020 election. First, the pollsters were wrong again. Secondly, American voters do not want a radical shift in economic policy.
Although the states have not yet formally certified their election results, statistical evidence compiled by the media strongly favors Biden winning. Until the votes are certified, there remains some ambiguity; recounts will be automatic in some states because of the closeness of the results and President Trump will keep pushing back with court cases. That said, the odds favor a Joe Biden Presidency for the next four years.
However, it also appears that for at least the next two years, he will be interacting with a Congress that is controlled by Republicans. We know it is 2020, and anything can happen, but after Alaska and North Carolina reported, it appears that Republicans will have at least 50 seats in the US Senate. The outcome of two runoff elections in Georgia, taking place in early January, will determine the final Senate make-up and it appears Republicans will win at least one of those.
In addition, Democrats lost perhaps 10 seats in the House of Representatives and when all the counting is done, we expect the Democrats will have about 224 seats versus about 211 for Republicans. Because mid-term elections have historically favored the party out of power, this result is causing the moderate wing of the Democrat party to push back against their more progressive members.
It also appears that this pushback has teeth because Republicans around the country, in both House and Senate races, generally won by greater margins or lost by narrower margins than President Trump in their districts and states. And Republicans increased their power at the state legislative level.
As far as policy goes, what all this means is that a major tax hike, the Green New Deal, and Medicare for All are probably off the table. Yes, a Biden Administration will pursue different initiatives than a Trump Administration, but the federal courts and all those Trump appointees during the past four years are likely to restrict how much change Biden can accomplish in the next two years.
In terms of legislation, we expect Congress to pass a stimulus bill in the lame duck session, but it will not be the $3 trillion that Speaker Pelosi was pursuing before the election. It is also unlikely that it will bail-out the states, which is particularly painful for Illinois, but we still expect a $1 trillion package to help with distributing a vaccine and provide more money for unemployed workers.
Next year, investors should expect some sort of infrastructure spending package passing with bipartisan support. President Biden will want to pass some sort of fiscal stimulus to keep the recovery going; we are looking for an increase in the itemized deduction for state and local taxes to around $20,000 from the current level of $10,000. Normally we would expect the GOP to oppose this policy change because it's a bigger tax cut for residents in high-tax states, who tend to vote for Democrats than it is for people in low tax states, who tend to vote for Republicans, but it's still a tax cut, not a hike.
We expect under Biden that trade wars and tariffs are off the table, however, Biden campaigned on both holding China accountable and on taking a tough stance on them.
Meanwhile, the economy continues to grow and corporate performance continues to improve. According to FactSet, 89% of all S&P 500 companies have reported earnings for the third quarter and 86% of them have reported earnings above expectations. This is happening for two reasons. First, revenues have been better than expected, and second, costs have been cut as companies have adapted to challenging times. Productivity is up 4.1% from a year ago.
With news of two new effective vaccines, both with better than 90% positive results, expectations that fiscal policies will not change in any major way, continued low interest rates, and the entrepreneurial power of the US economy, the stock market is well on its way to continue making new highs. As we have reminded investors over and over, personal political preferences can cloud judgment, but the market is typically indifferent to who is the President. The lack of volatility leading up to the election, during election night, and this past week (with election results not yet certified, ongoing legal challenges to the election outcome, and no concession speech) makes that point, powerfully.
Source: Brian Wesbury, First Trust
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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