The 2020 election was an arduous and, in some ways, incredible process, with the unprecedented number of mail-in ballots resulting in record turnout, but also a significant delay in announcing the winner. Nevertheless, we know that Joe Biden will be the next President of the United States come January. In all likelihood he will face a divided Congress. Democrats retained control of the House of Representatives but face a pair of must-win run-off elections in Georgia to achieve a 50-50 split in the Senate, which would give Vice President Harris the tie breaking vote. It is possible that Democrats could win both elections (betting markets give them ~20% odds of doing so), but for the purposes of this exercise we assume that the Senate will remain under Republican control.
What does this outcome portend for markets and for credit investors? The answers are invariably uncertain, but we can at least hint at what a Biden Presidency with Republican opposition will look like on a few fronts.
Fiscal Policy: Some Stimulus with Restraint
- A second stimulus deal is now likely, albeit at a lower dollar amount than Democrats would like.
- The tax cuts/reforms of 2017 are safe.
- Fiscal consolidation remains on the backburner.
On the first point, passing a new stimulus bill is likely to be one of President-elect Biden’s top priorities upon taking office. It is also one of the more achievable objectives, given existing bi-partisan support for further stimulus and the groundwork laid by negotiations between House Majority Leader Nancy Pelosi and Treasury Secretary Steven Mnuchin. The final deal will likely be smaller than the $3 trillion plan laid out by House Democrats back in May, and could require the inclusion of a sweetener to win over the support of Senate Republican leadership. Even so, there seems to be the political will to get something done on this front.
On the second point, with Republicans retaining control of the Senate, the tax cuts passed in 2017 are likely safe. President-elect Biden has proposed an effective reversal of the tax cuts on higher earners and corporate income as a way to pay for other parts of his agenda. However, this is a political non-starter for Republicans. It also plays into the third point: with interest rates so low and economic conditions depressed, additional government spending is more likely to be funded with higher deficits than higher taxes.
Regulation and Health Care: Major Overhauls are Off the Table
With Republicans retaining control of the Senate, large-scale regulatory changes are unlikely. And proposals for a major climate initiative, as well as a public option in the health care market, are likely dead in the water. However, incremental changes are still possible via unilateral action. Biden has pledged to rejoin the Paris Climate Accord the day he enters office. In addition, his appointments to various cabinet positions and agencies could reinvigorate regulatory enforcement in specific pockets. For instance, the Consumer Financial Protection Bureau will likely become more active, impacting the financial industry at the margin. Nevertheless, in general the status quo will likely prevail.
Trade Policy: Substantial Leeway
- Biden will likely maintain pressure on China while easing trade tensions with allies.
- He can be expected to renew support multi-lateral institutions.
Trade is an area where the Biden administration will have a substantial amount of leeway. On the face of it, it seems Biden is unlikely to be explicitly “pro-trade.” His proposals call for re-shoring of critical supply chains and $400 billion in government purchases of American goods. He has been openly critical of China in speeches and has not committed to walking back any of President Trump’s tariffs on $370 billion worth of Chinese imports.
On the other hand, it is almost certain that Biden will seek to fortify relations with allied nations. Amongst other things, this could involve a removal of tariffs imposed by the Trump administration on goods from the E.U. It also reduces the risk of further trade conflict with our allied trading partners, most notably Canada and Mexico.
Finally, the Biden administration is likely to renew support for multilateral institutions that back global trade. This is particularly relevant in the case of the WTO (World Trade Organization), where the Trump administration had taken an adversarial stance. This resulted in the WTO being effectively neutered, as the U.S. ignored its rulings and blocked it from appointing judges to adjudicate on cases.
Overall, a Biden administration should be generally supportive of market conditions. We saw this dynamic play out in markets last week, as stocks rallied once the outcome of the election became apparent. In general, a fiscal package in the range discussed by Pelosi and Mnuchin (~$1.5-$2 trillion) would be supportive of rates, as well as a positive for consumer-facing sectors such as retail and banks. Improved relations with our allies and support for trade organizations should reduce the risk of further trade conflict.
Furthermore, the restraint imposed on the administration by the Republican majority in the Senate is positive from a credit perspective. The risks to health insurers from a public option are diminished, and oil and gas issuers should benefit from less movement on the environmental front. The maintenance of the corporate tax cuts is also positive for investment grade issuers across industries. That being said, much of the outlook hinges on the government finding ways to compromise on fiscal policy and eventual vaccine distribution. Stasis on those two issues could override positive developments elsewhere.