On Tuesday January 20th at noon eastern, as prescribed by the Constitution of the United States, Joseph Robinette Biden Jr, having been certified as the winner of the 2020 Presidential election contest will be sworn by Chief Justice John Roberts as the 46th President of the United States. Every American presidential election is contentious; however the extraordinary partisanship of the election season has carried over into what is usually a time of “good feelings” as power is transitioned from one administration to another.
While the Democrats now have effective control of both the House of Representative and the Senate, the slender majority in the House along with a split Senate is likely to test the political skill of the new President to enact his agenda.
Naturally, the incoming US administration will also affect the business environment. Our research does indicate that there will be clear sector winners and losers in a Biden presidency.
However, changes in presidential administrations rarely lead to material fundamental changes to the US economy, even when we swing from conservative to liberal, or vice versa. In terms of overall market performance, we have seen the markets do well under both Republican and Democratic presidents. However, there are aspects investors might want to turn their attention to.
The path of the Covid-19 vaccine rollout is likely to be at the centre of Biden’s early days in office; he has committed to 100 million vaccinations in his first 100 days. To mitigate the impact of the pandemic we anticipate a new round of stimulus, a package which includes a combination of additional support to small businesses and direct payments to households amongst other things, to be the first order of business for the new administration and Congress. This commitment could make a real difference as short-term fiscal stimulus is the bridge across the chasm in the economy resulting from the current health crisis.
Identifying winners and losers will be key for investors in US equities
Over the course of 2020, the S&P 500 produced a total return of over 18%, remarkable considering it endured the quickest descent into a bear market in history; taking just 16 trading sessions to fall 20% in March and falling by over 30% from peak to trough. But with equities now sitting close to all-time highs again driven by fiscal and monetary stimulus and access to effective vaccines getting steadily stronger, the major question for investors in US equity markets is how to position their portfolios for an economy returning to normal after the Covid-19 shock? Against this background, we believe an active discipline approach fuelled by deep fundamental research makes sense.
On the sector side there will likely be winners and losers due to shifts in policy whilst much about the political and economic backdrop will remain in flux. Therefore, our US Equity team is working closely with our Fundamental Research team to analyse the major themes that will drive our sector positioning and stock selection over the months and years to come. With heightened volatility and increasing dispersion in stock returns, it is more important than ever to cut through the noise. Understanding how individual companies are likely to perform in an environment dominated by the major themes that we have identified is likely to yield significant opportunities over the coming quarters and years. This is a situation that strongly favours an active, bottom-up approach to stock selection based on fundamental research.
Lessons learnt from history
The peaceful transition of power in America dates back to 1797 with George Washington passing on the responsibilities of the Office of President of the United States to John Adams. Given the political divide the country is experiencing at the moment, it will be important for investors to overcome a reflexive tendency to respond emotionally. History tells us that the economy and the markets will move on. We will remain committed to supporting our clients and keeping their success our priority.