As Joe Biden prepares to take the presidential reins from Donald Trump, investment expert MATTHEW FEARGRIEVE considers the implications of a Biden presidency for your investment portfolio and what action investors should be taking
Leaving aside the fall-off of the S&P500 as Donald Trump’s current refusal to concede the election plays out (something that investors will need to keep a close eye on), it is axiomatic that when the US sneezes, the rest of the world catches a cold. And, whilst investors naturally keep an eye on the US as an economic bellwether, we should keep in mind that the US went into recession in February 2020 and has not officially re-emerged.
The 2020 Election: What Didn’t Happen
First, what didn’t happen. The so-called Blue Sweep that some pundits had predicted, as Trump’s popularity appeared to wane in polls on the run-up to the election, did not materialise. Trump did significantly better than the markets had expected. History tells us that a Democrat in the White House enjoying a majority in both houses of Congress usually results in an initial market sell-off, averaging a 2.4% drop in the S&P 500 in November following a sweep, with a recovery in December averaging 3%.
Over the past quarter century, when Democrats controlled the executive and legislative, the S&P500 rose an average of 9.8%, rallying three times in four after the election.
A Democratic sweep traditionally sees the renewable energy and industrials sectors benefitting from a new focus on infrastructure in Washington, while pharma (and, now, Big Tech) tend to dip on increased government regulation.
On the other hand, a Republican President presiding over a split Congress results in an average S&P500 gain of 5.3%, with stocks rallying following two in every three elections. And had Trump won, with Republicans holding the Senate and Democrats retaining control of the House, historical data tells us that the S&P500 would have enjoyed a short term rally of around 4% based on the election not having caused any earthquakes.
Far from the Blue Sweep, the Democrats managed to hold on to their majority in the House of Representatives but failed to wrest the four seats they needed to gain control of the Senate. There is a possibility that Democrats could win runoff races in Georgia leading to a deadlocked chamber, the more likely outcome is that the US will operate under a divided government.
And guess what? That’s not all bad news for your investment portfolio.
What Will (Likely) Happen; and Why Capitalism is a Coward
At the time of writing, it looks likely that Biden win be declared winner by the Electoral College, but Republicans will retain control of the Senate.
Being blocked by the Senate, President Biden would be significantly hampered in his ability to legislate new policies, most obviously a regulatory crackdown on Big Tech. This scenario therefore sees a continuation of Donald Trump’s lenient corporate tax policy, the counterpart of which would be Biden’s more stable trade and international policy.
There is a broad consensus that the markets would favour such a state of gridlock (or status quo?), with historical data suggesting that the S&P500 rising by an average of 13.6% and rallying after the election. The VIX Index (or “Fear” index), which measures expected volatility in the US stock market, tailed off in the immediate aftermath of the election, having touched its highest levels since June in the run-up.
In short, the market rally that began when Biden started pulling ahead should be seen in the light, rather than as significant of any major policy departure that Biden may be able to pull off. Clearly, capitalism is a coward, and investors shouldn’t let themselves get carried away by any post-election buoyancy in the markets. What we should expect, probably, is more of the same. And as we said at the top of this blog, the US is still in recession.
What Can Biden Do?
One thing we can feel reasonably safe betting on is that President Biden will be tougher on COVID-19 than Donald Trump was. The market rally on news of the Pfizer vaccine has cooled somewhat, as the realities of its global implementation sink in, and the ability of the US to keep the virus in check will remain a key concern for the markets.
Nonetheless, cyclical stocks are leading the vaccine rally, and they would benefit greatly from a Biden-driven central bank response to reflating the US economy. Such a Federal policy-led stimulus, together with the likely downward trajectory of the greenback, suggests that US equities will fare a lot better than US bonds in 2021, although it has to be said that the prospect of a stimulus bill has been greeted by the markets, post-Election, as a broadly positive prospect for bonds as well as equities.
So what does Biden mean for my Portfolio?
Well, for a start, maybe a pivot towards US stocks and away from US debt instruments for 2021. For this reason, we think that the traditional weighting of equities-to-bonds in the US section of your portfolio should be revised in favour of equities. If you don’t want to implement this yourself, a multi-asset investment fund can provide a convenient balance of equities and bonds with less risk than a fund investing only in equities. You can read more about this in our blog here.
After almost a year of coronavirus, growth stocks show no signs of losing pace over value stocks, the latter needing a sizeable economic fillip upwards for their re-emergence.
We think that, because of the policy inhibitors the Republicans will place on Biden, investors do not need to be overly wary of Tech stocks, but they should nonetheless keep in mind the combination of Big Tech’s high market power and low tax yield, which may prompt more regulatory action against stocks like Amazon, Google, Apple and Facebook.
One obvious corollary of a Biden presidency would be a broadening of your portfolio’s exposure to Healthcare, particularly given the Democrats’ promised reprisal of Obamacare. Speaking of Obama, his administration tried but made little inroads into the ability of Pharma to fix its own prices for its own drugs. Investors should not forget that the US population is an ageing one.
Bank stocks are cheap right now, and we think the markets are overly bearish about them, for the reasons just mentioned. We think that there will likely be an across-the-board resurgence in prices following Year End reports, and certainly by the time of Biden’s inauguration in January 2021.
Infrastructure should do well under a Biden administration, being a sector historically favoured by the Democrats. Biden has pledged to spend US$1.7 trillion in order to turn the US by 2050 into a fully clean-energy economy, with net-zero emissions.
Companies with a play in “low carbon” should also be kept under surveillance by investors during Biden’s first term. Regulations are increasingly more likely across economies outside the US to reduce the energy demands powering infrastructure. This will similarly create opportunities for companies in this space.
We have explained in this blog how President Biden will face some real inhibitors from the Republican-held Senate on his ability to implement serious policy change. As we have seen, the markets are already responding favourably to this state of semi-deadlock (some would call it a continuation of the status quo in the US).
In our view, investors would do well to similarly react in a measured way, both to the Trump-Biden transitional process and thereafter to Biden’s first term. His presidency at the moment poses measurable and relatively low-impact risks that will, because of Republican blockers, take time to evolve, giving investors opportunity to adjust their portfolio accordingly.
Investors will likely find themselves implementing this strategy in a time of buoyant US equities, which are set for a healthy 2021 if the incoming POTUS is able to get to grips with COVID-19 in the US and manages to reflate the US economy with a programme of centralized fiscal stimulus.