Election 2020: It’s over. What’s next?
With the runoff senatorial elections in Georgia settled, and the Electoral College votes certified, the 2020 presidential and congressional election cycle is now officially over. The result is that Democrats will control the executive and legislative branches of government, allowing for easier Cabinet position confirmations and, for at least the next two years, the upper-hand in setting the legislative agenda.
While the Democrats will control both houses of Congress, majorities are razor-thin, particularly in the Senate. The 60-vote filibuster rule, as well as several “conservative” Democrats, such as the “other” Joe – Joe Manchin, W. Va., will constrain the party legislatively. Therefore, the Democrats may look to use the budget reconciliation process in the Senate which, once a year, allows a budget bill to pass the Senate with a simple majority. We expect the following developments to be likely.
COVID-19 and the Economy
- More and larger stimulus support for the economy will be Biden’s first priority, potentially including raising the maximum of $600 in direct payments to individuals, as directed in the current Stimulus Bill, to as much as $2,000 in direct payments, as well as greater support for the states and small businesses.
- GOP will continue its fight for COVID-19 corporate liability protection, but it likely will not pass.
- Escalated vaccination distribution will take place to gain control over the pandemic.
- Targeted $2 trillion in funding will go toward clean energy and infrastructure spending with the goal of net-zero emissions.
- Supplemental unemployment benefits provided through the CARES Act that expired in July 2020 will be extended from December 2020 through March 2021, albeit at $300 per week or half the rate set in the CARES Act.
- Executive orders will be issued on climate change and rejoining the Paris climate accord.
- Repeal of the Trump administration corporate tax cuts, with an increase in corporate and capital gains taxes for those making more than $1M, as well as higher personal tax rates for individuals making more than $400K. This will most likely be put off until 2022 due to the current economic downturn, and the narrow majority will most likely require compromises.
- A 50% reduction in the estate and gift taxes exemptions from $11.58 million to the $5.79 million amount pre-Tax Cuts and Jobs Act of 2017. Like the ordinary income tax, this is also scheduled to sunset at the end of 2025, and this date could possibly move forward to 2021. Should this be the case, the IRS is already on record stating that it will not “claw” back any previous gifts or bequests of assets. Even if it does not go all the way back to the original $5.79 million, there is a chance it goes back part way, to possibly around $7 million.
- When implemented, tax increases are expected to be used to provide funding for social support, such as affordable housing and increased child and eldercare.
Labor and Civil Rights
- Increase in the federal minimum wage to $15/hour.
- Relaxation of immigration policies, which will expand labor supply for the restaurant and overall service industry.
- Improvements to federal protections for LGBTQIA Americans.
What Will Be the Impact on the Market?
Historically, the correlation between the performance of the broad equity markets in the U.S. and control by either political party is relatively weak. However, the stated agenda of the Biden administration suggests that some industry sectors and asset classes may meet with stronger tailwinds than others in the near- to intermediate-term. Market impacts directly related to the new political realities are likely to include:
- Improving prospects for sectors providing construction equipment, asphalt, and other products related to infrastructure spending.
- Increased opportunities for companies involved in green energy production and distribution as well as those supporting conservation.
- An uptick in small cap stocks as more stimulus becomes available for smaller companies.
- Further weakening of the dollar.
- A rotation to value equities, as growth companies may be impacted by inflation expectations and potential tax hikes.
- An anticipated steepening of the yield curve with an increasing focus on emerging market debt.
- A move away from the Work From Home (WFH) winners to those related to a healthier economy.
- Possible tempering of technology returns in anticipation of potential increased regulation related to antitrust and privacy issues.
As a core principle, we believe in long-term, goals-based strategic asset allocation and maintaining a diversified portfolio. However, we continue to closely monitor events that can influence the market and can drive dynamic tactical allocations to boost overall returns.