The US election and policy implications

How should we view the implications of the US election? Financial markets have reacted positively to the election result, with equities strengthening globally, while bond yields remain low. This is despite two unfinished aspects of the election that the markets will need to keep focused upon: the contesting of the election result by President Trump; and control of the Senate to be determined by two run-off elections in Georgia in January.

The markets are no longer expecting an imminent fiscal stimulus, but the latest comments from the Fed, last week, reflect a bias towards easing. This is helping to underpin markets. Alongside politics and the economy, the virus continues to be a major concern as we remain in a vaccine gap phase and latest data shows cases and deaths rising. This continues to weigh on the economy, although the good news last Friday was that US unemployment fell by 1.5m in October, to 11.1m.


Also, payrolls rose by 638k and have now risen for the last six months but are still 10.1m below their February peak. This is consistent with the recent growth figures that show the US economy has rebounded. The economy remains vulnerable to any deterioration on the health front, but is expected to recover over the next year, helped by the considerable policy stimulus that has already been unveiled. The markets, naturally, are following progress on the vaccine closely.


The upcoming political dates are: legal challenges are expected imminently; electoral college voters to meet on December 14th (this is a formality to confirm the presidential election result); Jan 3rd new Congress; Jan 5th Senate run-offs in Georgia; Jan 20th inauguration day of the new president. Until then, President Trump remains in office.


We are not examining here the politics behind the elections, but based on the latest projections this is the state of play:


President-elect Joe Biden, and Vice President-elect Kamala Harris, have surpassed the 270 electoral college votes needed to win.


The Democrats retained control of the House of Representatives (Congress) despite the Republicans making net gains. The Democrats had won control of Congress in the 2018 mid-term elections, gaining a net 41 seats. In this election, all 435 seats were contested, and a majority of 218 was needed. The Democrats were expected to make gains. With 24 votes to call, the Democrats hold 215 seats, and the Republicans 196, having made a net gain of five.


The Senate is currently 50-48 in favour of the Republicans, with the two run-off elections in Georgia in January. The Democrats have not had a senator in Georgia since an outgoing senator in 2005 but if they were to win both run-offs then the result would be 50-50 and in the event of a tied Senate, the vice-president holds the balance of power. Before the election, the Republicans were 53 v 47 (Dems 45 + 2 independents). 35 seats were contested, with the Republicans defending 23 and the Democrats 12. In this election, the Republicans flipped one seat (Alaska) and the Democrats filliped two (in Arizona and Colorado) for a net Democratic gain of one.


Democratic control of the Senate through the vice president’s deciding vote would, in theory, allow the Democrats to push through more contentious legislation if they wished. But it is not clear that it will come to that, either in terms of the Senate outcome or the approach taken. There was no clean sweep, and President-elect Biden has adopted a conciliatory tone since winning.


Although he will not assume office until 20th January, 2021, the president elect is expected to outline executive orders he will sign immediately, once president, including the US re-joining the Paris Climate Accord, that the US officially left last Wednesday, and the World Health Organisation.


On the global stage, the main change will be on the climate agenda. The UK was one of the first countries to commit to a net-carbon zero agenda, by 2050. China recently committed to net-zero by 2060. It would not be a surprise if the US committed to net-zero, too. It also aligns all the major economies into addressing climate change. Next year the UK hosts the next major climate meeting in Glasgow. The UK is also hosting the G7 next year and should, in my view, add climate change to that agenda, too.


The US will also reengage with multilateral organisations. Alongside the climate agenda, the most significant change could be on trade – and a shift away from President Trump’s approach based on bilateral trade numbers and negotiations. A Biden Presidency looks set to play a bigger role in the World Trade Organisation and also to join the Trans-Pacific Partnership. The UK, too, is looking to join this.


With the Indo Pacific region set to be the most dynamic region of the global economy – from India in the west to America in the east – a Pacific trading arrangement including the US should be good news for growth in that region and for reducing trade and non-tariff barriers.


However, the big focus will be geopolitical in terms of the US-China relationship. China is not a member of that trade arrangement. The current consensus is that there will be a resetting of the US-China relationship in tone, and that trade wars may be less likely, but that there will be friction in strategic areas.


It is the domestic US agenda that will be key. With this election being tight, there will, one might imagine, be a focus on delivering results well ahead of the mid-terms in two years. That is, Biden might aim for some quick wins. The focus will be on the pandemic and also on ensuring economic recovery to reduce unemployment.


On the domestic agenda, the bias of the new president will be towards regulating tech firms more, increasing taxes for corporates and higher earners and delivering health care reform. How adventurous he will be remains to be seen. In macro-economic terms, the tendency is to think of increased government spending – including infrastructure – financed by higher revenues from stronger growth and tax increases. Monetary policy will remain accommodative, as the Fed has already outlined.


The challenge in the US, as in other major economies, is to overcome the health crisis before making inroads into the economic crisis. A return to stronger, sustained growth is needed in an environment where public debt levels are already high and monetary policy is already very stimulative. There is little policy room to respond to future shocks. The significant stimulus already unveiled should allow the US economy to recover over the next year.


Please note, the value of your investments can go down as well as up.

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