U.S. policy and investment implications
• Corporate tax increase
• Pharma pricing
• Reinstate EPA regulations
• Personal tax increase
• Minimum wage increase
• Expand ACA
• Student loan forgiveness
• Multilateral instead of unilateral action
• Restore full U.S. membership in WHO
• Try to rejoin Iran nuclear deal or negotiate new deal
• Create new climate standards
• Take more aggressive approach toward Russia
Source: BMO Global Asset Management
The president’s response to the COVID-19 pandemic is his first priority. The administration has already made it clear that their goal is to vaccinate at least 100 million people within the first one hundred days of Biden’s term. The first major fiscal item to be considered will be a COVID-19 relief package. Though the president would like this to be bipartisan, many Republicans have seemed hesitant to spend additional funds and disagree with some of the more controversial initiatives, including a $15 minimum wage. As presented, the bill calls for around $1.9 trillion, including $1,400 stimulus checks. A group of moderate Republican Senators countered with a $600bn bill, but we believe President Biden will try to proceed with his current bill. Ultimately, our expectation is that the Democrats utilize reconciliation on a final bill with a price tag modestly lower than the $1.9tn bill and without the more controversial aspects such as the $15 minimum wage. Regardless of how the bill is passed, we see this as a positive for both the economy and risk assets. Income substitution is a viable way to keep money in the pocket of the consumer, and adding to the record savings rate of Americans will lead to an explosion of pent-up demand once life normalizes.
Another top priority of the Biden administration will be reforming the tax code to bring in additional revenue for the increased spending. During the campaign, then-candidate Biden framed tax increases on the rich and corporations as a moral issue. We expect tax increases through another bill passed along partisan lines later in the year. Under this anticipated bill, the headline corporate tax rate will likely increase on the margin, but given narrow majorities may be harder than expected. Additionally, taxes on foreign earnings will likely increase in a substantial manner.
On the personal side, we expect the marginal rate for those making over $400,000 to increase to 39.6%. We do not expect other proposals such as capital-gains tax increases, a wealth tax or a financial-transaction tax to pass through Congress. Additionally, we believe there is a decent chance for an increase in the state and local tax deductibility limit, as that has been a priority for Democrats from high income tax states. Increased corporate income taxes will hit company earnings, but in the short-term, we believe that massive fiscal stimulus will outweigh the tax threat. Additionally, more moderate members of the House and Senate will likely water down some of the more controversial options.
Infrastructure and energy bill
Outside of COVID relief, infrastructure provides the best hope for bipartisanship The president is widely expected to unveil a massive spending bill during his first joint session of Congress. The bill currently being telegraphed by the White House will be between $2 trillion and $2.5 trillion in scope. This package would be spread out over five years with the majority going toward traditional infrastructure projects like roads, bridges, airports, etc. However, we also expect this bill to be a down payment on Biden’s promise to tackle global warming. A large portion of the funds will go toward green-energy projects, new technologies to limit carbon emissions and upgrading the U.S. electric grid. Traditional infrastructure companies as well as green-energy companies stand to benefit from this bill.
Trade and foreign policy
We expect a vastly different approach to trade and foreign relations from the Biden administration. As of this date, the U.S. has already rejoined the Paris Climate Accords and the World Health Organization, undoing moves by the Trump administration. On the trade front, the use of tariffs as a diplomatic tool will decrease significantly, especially with regards to the EU and other traditional allies. However, we expect relations with China to remain chilly. Tariffson China may be reduced over time, but other Trump-era restrictions will stay in place. The cold war between the U.S. and China will continue as intellectual property, technology transfer and supply-chain concerns remain unresolved.
A note on technology companies
Healthcare and pharma
Narrow majorities in the House and Senate make liberal healthcare priorities like “Medicare for All” and a public option unfeasible. We expect less sweeping changes to the health-insurance market, such as increased subsidies and an expansion of the Affordable Care Act. These changes will help managed-care companies, while health-insurance companies can breathe a sigh of relief. The pharmaceutical industry, on the other hand, will likely be hurt. It is a bipartisan priority to enact some sort of price controls in the prescription-drug market, but we do not expect the changes to be as drastic as initially feared.
An administration that will increase the regulatory burden on business and raise taxes does not seem like a market-friendly election outcome. However, given the sizable spending that will pair with these initiatives, we see fiscal policy as a positive, especially over the next couple of years. We remain pro-risk in our portfolios, as we believe synchronized global growth will continue as populations get vaccinated and hard-hit areas such as tourism, dining and entertainment return to some sort of normalcy. Americans are currently sitting on record savings and will deploy that capital once things normalize, and emerging-market companies are inundated with back orders and supply-chain issues. Given these factors, we are currently overweight both large- and small-cap U.S. equities, as we expect a broad-based recovery. Additionally, we are overweight emerging-market equities and are using core fixed income as a funding source for all overweight equity positions.
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