The first 100 days of a presidential term have symbolic importance, serving as an early measure of how effective a president will be during their time in office. The national fixation with the first 100 days came about during the presidency of Franklin D. Roosevelt. Taking office during the Great Depression, Roosevelt was extraordinarily productive: he signed 76 pieces of legislation – 15 of them major – during his first 100 days as president.
President Joe Biden’s term begins as the country struggles to heal from the ongoing COVID-19 pandemic and the aftershocks of a contentious election. While Biden proposed a range of significant policy changes on the campaign trail, the initial focus of his administration will most likely be on supporting the economy and containing the virus.
As we’ve emphasized in previous commentaries, what ultimately gets passed into law can be very different from what is promised on the campaign trail or proposed to Congress. Right now, Democrats hold only a slight majority in both chambers of Congress; Republicans and Democrats technically hold an equal number of seats in the Senate, but with Vice President Kamala Harris holding the tie-breaking vote, party-line standoffs will likely tip toward the Democrats.
With the Senate split 50/50, Biden will need the support of all of his party as well as 10 Republicans to get the 60 votes needed to pass most legislation. However, some policies could be fast-tracked through the budget reconciliation tool. This process allows the Senate to pass legislation with just 51 votes, with funding to be paid for over 10 years. In the end, many of these policies may require a combination of budget reconciliation and the 60-vote supermajority.
Although we’ve emphasized that market performance is more dependent on business cycles and fundamentals such as earnings and interest rates, the policy priorities of any new administration will have implications for investors. Here’s a snapshot of the major issues that Biden will look to tackle during his first 100 days in office, along with takeaways for investors.
1. The Pandemic
Hours after his inauguration ceremony, President Biden signed an executive order mandating masks and social distancing in all federal buildings and among all federal employees and contractors. He also halted former President Donald Trump’s efforts to leave the World Health Organization.
Biden has made clear that containing the pandemic and rebooting the economy are his main priorities. On January 14, Biden unveiled a $1.9 trillion stimulus package to support families and businesses through the pandemic. The American Rescue Plan consists of three areas of relief: aid to the unemployed, hungry and those facing eviction; support for small businesses, states and local governments; and increased funding for vaccinations and testing.
Highlights of the plan include direct payments to individuals of $1,400. This would be on top of the $600 checks approved by Congress in December. The plan also includes a weekly $400 federal unemployment supplement, to begin in March (when the previous $300 supplement expires) and last through September 2021. There are also provisions for rental assistance for low-income households struggling to pay bills.
Small businesses would also get funds in Biden’s plan via low-interest loans and grants. State, local and territorial governments would receive $370 billion, including $20 billion for public transit systems, which would help alleviate the higher costs and lower tax revenues faced by many. Lastly, the plan calls for creating a national vaccine distribution program, earmarked at $20 billion, that would offer free shots to all U.S. residents.
It is unclear what pieces of the plan will ultimately get passed and whether Biden will be able to obtain bipartisan support to secure the 60 votes needed or whether he will utilize the budget reconciliation process for some items such as stimulus payments, unemployment benefits and the expansion of several tax credits.
2. Climate Change and Infrastructure
On his first day in office, President Biden moved to have America rejoin the Paris climate accord and asked federal agencies to look into reinstating many of the environmental regulations that had been scaled back under former President Trump. Climate change is a central focus for Biden: he wants the U.S. to reach zero net carbon emissions by 2050.
With the economy operating far below its pre-pandemic level, Biden is expected to focus on job creation and reforming infrastructure in the coming weeks. Infrastructure is a priority that both parties seem to support, and could help bolster the labor market. Although there has been a sharp recovery in the labor market from the 20 million jobs lost during the height of the shutdown last spring, the unemployment rate still sits at 6.7% – down from the high of 14.8%, but almost double the rate prior to the start of the pandemic.
Biden’s campaign agenda included promises to expand the Affordable Care Act and expand Medicare. It may take time to fully see Biden’s healthcare plan take form, but in the earliest days of his administration, the president is most likely to tackle issues that have bipartisan support. Those issues include lowering prescription drug prices; making medical care prices more transparent; and widening access to telehealth and mental health services.
4. Foreign Policy and Trade
President Biden is expected to transition from an “America-first” approach to a multilateral approach that is expected to rebuild foreign relations. On his first day, the president lifted the 2017 travel and immigration ban on predominantly Muslim countries and stopped construction on the Mexican border wall. Since trade policy is controlled by the executive branch, Biden will reassess the tariffs enacted under former President Trump and likely work with allies to pressure China to stop intellectual property abuses. In addition, Biden is expected to support “Made in America” manufacturing.
Although President Biden campaigned on sweeping tax changes – including increasing the corporate tax rate, reversing the 2017 marginal tax rate of the highest income earners, increasing long-term capital gains for those with income over $1 million, and raising taxes on those making $400,000 or more a year – the scope of changes and timing is uncertain.
Proposals such as a modest increase in the corporate tax rate and returning the top individual tax rate to 39.6% seem to have the highest chances of success. But there is far less agreement among Democrats on other proposals, such as making changes to the estate tax or increasing taxes on capital gains and dividends for wealthier individuals. Those may be tougher to get through Congress, even with a Democratic majority. Even if individual tax code changes do get approved this year, there is little historical precedent for those changes to be retroactive to the beginning of the year.
TAKEAWAYS FOR INVESTORS
Our annual economic forecast, 2021 Outlook: Brighter Days Ahead, assumes that the combination of vaccine rollouts, a continued commitment to accommodative policy and an increased focus on fiscal policy would lead to an economic recovery back to pre-crisis levels in the second half of this year. Even though our assumption at the time of that writing was for a divided government, we still expect the policy priorities of the new administration to reinforce some of the key investment and planning themes we are recommending to our clients.
Position for the Cyclical Reopening
While economic growth has been scarce since the start of the pandemic, which enabled growth and technology stocks to lead the advance from last year’s lows, a broadening, stronger economic recovery should potentially allow for a change in leadership. In fact, the rotation from growth to cyclical, value-oriented investments has been underway since last September. The Democrats’ control of both chambers of Congress and a focus on strengthening a stalled recovery suggest that this rotation should persist. This backdrop is likely better for value stocks, many of which are found in domestic small cap and international developed equities indexes.
Diversify Across Equities
The U.S. dollar has lost some of its relative strength against a basket of currencies in 2020, largely due to a combination of swift actions by the Federal Reserve to cut short-term interest rates to zero and expand its balance sheet, as well as the diminished fears of a major financial crisis. Given the Fed’s adoption of its symmetrical inflation target, the central bank should keep rates lower-for-longer. This, along with expectations for additional fiscal stimulus under the new Congress, will likely continue to put downward pressure on the dollar.
A weakening dollar implies that U.S. large cap stocks will likely no longer lead other styles as they have over the prior decade. In general, emerging market equities do better in a weaker dollar and low interest rate environment. International developed equities, which are more heavily tilted to cyclical stocks, should benefit from the rotation to value as well as a weakening dollar. Thus, diversification will very likely be your friend in 2021 and beyond.
Consider Municipal Bonds
The potential for higher tax rates on the highest income earners may support demand for municipal bonds. In addition, proposed fiscal relief to aid states and municipalities should help bridge the revenue shortfall, but many municipal entities will face a challenging budget environment this summer. That is why diversification within this sector with a focus on bottom-up, research-driven analysis of individual securities will be important to uncover opportunities and control risk.
Uncover Value through Bottom-up Security Selection
There will clearly be sectors, industries and stocks that will benefit from any change in policy. It’s important to take an active approach to uncover bottom-up opportunities based on the expected winners and losers. Some areas our equity analysts are evaluating include renewable energy stocks likely to thrive from a focus on reducing carbon emissions and healthcare stocks that can benefit from containing and distributing vaccines. Cyclicals, including financials, materials, industrials and energy will benefit from additional rounds of stimulus and higher levels of infrastructure spending, but the administration’s regulatory agenda will weigh on parts of these sectors in the intermediate and longer term.
Be Prepared for a Change in Tax Policy
While tax changes may be coming, there are still a lot of unknowns and it is likely that any changes won’t be effective until 2022. Still, income, estate, gift and generation-skipping tax planning should be front and center in 2021. For investment portfolios, there are tax-aware investing strategies that help to maximize after-tax returns and planning strategies that can help you mitigate future taxes. In addition, estate and gift taxes are another important area of focus as the federal estate/gift exclusion, which allows individuals to give away $11.58 million ($23.15 million for a married couple) over their lifetime, could be substantially lowered. Thus, for those who may want to use this exemption and protect it from future tax changes, they should consider doing so this year.
History tells us that the party who controls the White House and Congress does not have a material impact on stock market performance. In fact, since the 1930s, the stock market has delivered high single-digit returns under a Democrat-led White House and Congress. Fundamentals, such as the strength of the economy, earnings and interest rates, matter more to the markets than politics. But to the extent that policy can influence these market drivers, it becomes another element that our Investment Strategy Committee considers when determining how to position portfolios with a 12 to 18-month time horizon in mind.
Overall, we expect the early days of the Biden administration to focus on policies that are stimulative to the economy and help contain the virus – both of which should be good for a still-fragile economic recovery and risk assets. We believe our clients are well-positioned for this political and economic landscape, but we will continually evaluate policy impacts on business, economic and capital market cycles.