THE BEST OF BOTH WORLDS?
Mark Lister, 9 November 2020
As was the case four years ago, most of the US election polls proved incorrect in 2020.
It was predicted that former Vice President Joe Biden would romp home, although President Donald Trump performed much better than expected and the results were too close to call on the night.
When the dust settled, Biden was victorious.
However, the real surprise for financial markets, and the reason for a strong US sharemarket rally during the following days, was the outcome of the Senate race.
Most forecasters were predicting a Democratic clean sweep, which would’ve seen them in control of the White House as well as the Senate.
However, although Biden has won the Presidency, the Senate appears set to remain Republican.
A divided Congress will be frustrating for Biden, as it will limit what he can do. For financial markets, gridlock is good. It means we won’t see dramatic change, which reduces the likelihood of major policy shifts.
This means we won’t see the significant, debt-fuelled fiscal support that the Democrats were hoping for. It also makes it much less likely Biden will be able to raise taxes or increase regulation as he’d hoped.
Trump was certainly the more business friendly candidate, but markets will be happy with the consolation of a divided Congress, which largely means business as usual.
The winners against this backdrop will probably be the same companies that have performed so well during the last four years, such as those in the technology sector.
Companies with domestic US operations will benefit from an unchanged tax regime, while the healthcare sector should avoid any major industry changes.
The much lower likelihood of US corporate tax increases should also benefit companies in New Zealand that do business in the US.
Fiscal stimulus is still likely, although it won’t be nearly as significant as it could’ve been if we’d seen the Democrats win across the board.
This could mean lower for longer interest rates in the US, as central banks do more of the heavy lifting without the same dose of government support.
Finally, foreign policy could be very different under Biden. Relations between the US and China will hopefully improve, as he’ll take a more considered approach to managing any differences of opinion.
Companies doing business across the globe, and those with supply chains in multiple countries, could experience a clearer path forward without the same degree of uncertainty and tension.
This could be an important development for New Zealand, as an exporting nation that depends on trading relationships with other countries, as well as the rules-based approach of the World Trade Organisation.
In short, we just might be lucky enough to have ended up with the best of both worlds.
The threat of higher taxes and increasing regulation looks to have dissipated, and we might have ended up with a President that will reduce international tensions and bring a world view closer to our own to the global table.