It’s now over a week since Joe Biden was declared the winner of the US 2020 elections. The uncertainty leading up to 3rd November was palpable and pervasive and placed a ceiling on significant capital gains. However, the week of the election was superb for risk markets, even as votes were counted. The S&P 500 appreciated 7.3%, the Russell 2000 increased 6.9%, the NASDAQ was up 9% and the Dow Industrials also ended the week 6.9% higher. At the same time the Dollar Index, a proxy for risk, declined 1.9%.
Clearly, the market was relieved to get the election over and done with. Moreover, Biden is the clear winner and legal challenges from President Trump are unlikely to alter this. This is important as it reinforces a sense of stability that there is an obvious leader that will lead the USA forward and play an important role in the global economic recovery.
A Biden win in this climate is well-timed given the announcement last week by Pfizer and BioNTech that their trials show a potential vaccine which is 90% effective in preventing COVID-19. This was boosted further by Moderna’s confirmation of a 94.5% effectiveness for its vaccine in trial data. However, Biden’s leadership here is also important to cement market relief and to date, he has assembled a new and impressive COVID-19 task force, led by three highly qualified co-chairs David Kessler, Vivek Murthy, and Marcella Nunez-Smith. Other members are specialists in their own right and bring a high level of competence to the table.
Markets are forward looking. Therefore, progress in the fight against COVID-19 will be discounted into market prices as participants look for signs of a return to a pre-coronavirus world and economic activity. In this regard, the Federal reserves unlimited QE program is supportive, and will likely be reinforced with expansionary fiscal policy in February. This is important because of the lack of fiscal cohesion into the election was one of the reasons for the ceiling on stock prices. On this note is also worth mentioning that the increase in the corporate tax rate from 21% to 28% will likely be delayed given how badly the economy and corporates were battered in 2020. This too will be seen as market supportive, at least in the medium term.
The Biden presidency will likely keep up the pressure on China but through a different approach. Whilst Trump chose a unilateral stance, Biden will likely choose a multilateral strategy and enlist the help of allies in the trade dispute with China. Moreover, whilst Biden may not be as protectionist as President Trump, the unwinding of Tariffs will likely be used in negotiation. This may introduce a modicum of uncertainty into markets if tensions arise.
An interesting market dynamic may arise as the Biden presidency develops. Democrats have already flagged big tech as being anti-competitive. The prospects for this sector should be considered as it was the big tech companies that led the market off of the March lows. If legislation is passed that will have a detrimental effect on the bottom lines of these companies there may be a rotation of leadership out of the NASDAQ and out of the FAANG stocks in particular. Since the election, we have already seen a short-term rotation with capital heading towards the industrial sector. Whether this becomes a trend or is just short-term in nature will be of interest and may reflect underlying structural changes as the US presidency changes hands.
Past performance is not indicative of future results.
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