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.
In conclusion
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.
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| Matthew Feargrieve is an investment consultant. You can read more about him here. |
Disclaimer: the
views expressed in this blog are the author’s personal views only, and nothing
in this article is intended to be financial advice.
