markets & economy | november 19, 2020
U.S. Elections Appear to Have Been Market-Friendly
Divided government likely would produce moderate policies.
Initial market reactions to the U.S. election have been favorable, but a disputed transition creates the potential for near-term volatility.
If Republicans keep control of the Senate after two runoff elections in Georgia, divided government could impede a Biden administration’s legislative agenda.
GOP Senate control almost certainly would rule out any significant tax increases. A Democratic presidency might focus more on regulation and foreign policy.
Washington Analyst, U.S. Equity Division
CIO, Fixed Income
John Linehan, CFA®
Although President Donald Trump has not conceded the race and has mounted legal challenges to contest key state vote tallies, the 2020 U.S. elections appear to have produced a presidential win for Democrat Joe Biden. Two runoff elections in Georgia in January will determine the balance of power in the Senate. Currently, a continuation of divided government appears most likely, with Democrats narrowly retaining control of the House.
While capital markets appeared to have reacted positively to the election, the postelection transition creates a potential for market volatility. However, T. Rowe Price investment professionals believe that other issues, such as further progress on a coronavirus vaccine, are likely to be more critical in the months ahead.
“I think eyes will be more on the response to COVID than on the election,” says John Linehan, CIO, Equity. “The only reason that could change would be if we got into an environment where there was a seriously contested election.”
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Election and Policy Issues
With Congress entering the “lame duck” period before President-elect Biden’s inauguration, markets will focus on the prospect for additional fiscal relief. Negotiations on such a package broke down shortly before the election.
Katie Deal, the Equity Division’s Washington analyst, sees only a “slim chance” of significant fiscal legislation before the end of 2020, with negotiations beginning in earnest for a 2021 stimulus package. Given the slim majority either party may hold in the upcoming Senate, Democrats will struggle to match their previous USD 2.2 trillion package, which failed to move beyond the House.
Divided government likely will dominate the fiscal picture in 2021—assuming Republicans hold at least one of two Georgia Senate seats headed for runoff elections. “In a GOP Senate, a proposed tax rate increase of any magnitude would be dead on arrival,” Linehan predicts.
The fiscal debate eventually could return to the question of what to do about exploding federal deficits, suggests Mark Vaselkiv, CIO, Fixed Income. For now, however, both parties appear to recognize the need to support the economic recovery. Failure to pass additional fiscal stimulus early next year could increase the risk of a double-dip recession, Vaselkiv warns.
Outlook for Monetary Policy
One significant factor that the election almost certainly will not change is the Fed’s massive liquidity support for the economy and the capital markets, which has pushed credit spreads down and enabled a surge in both investment-grade and high yield corporate debt. “What the Fed has done has been extraordinary,” Vaselkiv notes.
Yet, despite surging liquidity, short-term and long-term Treasury yields have remained relatively low and stable—a sign that inflation expectations are still muted. This could allow the Fed to avoid raising rates through 2024 and perhaps even into 2025, Vaselkiv adds.
Regulatory and Trade Policy
With major fiscal initiatives less likely in a divided government scenario, a Biden administration might look to regulatory policy to advance its agenda. This could include efforts to shift the U.S. energy base away from fossil fuels and toward renewables. While new energy regulation could deter capital spending in the sector, it might reduce supply and boost energy prices, Linehan says.
Major changes in health care policy appear unlikely, Deal says. And while both parties have expressed interest in regulating the big technology platform companies, their proposals are very different, making quick action doubtful.
Trade policy is another area where a new administration might try to differentiate itself, Deal says. Biden has expressed a desire for normalized relationships with traditional U.S. trading partners, such as the European Union, Japan, and South Korea. However, China may prove a different case. Biden could find it politically difficult to roll back Trump’s tariff regime without first making demonstrable progress with Beijing, Deal argues.
Capital Market Implications
For equity investors, the election is unlikely to change the wide variation in returns—especially between growth and value—that as grown over the past year. However, much depends on the course of the pandemic. Further progress toward a vaccine and stronger economic growth could benefit cyclical sectors such as energy, Linehan says.
In U.S. credit markets, low interest rates, declining default rates, and Fed support are likely to remain positive factors. However, longer-term Treasury yields could drift higher in early 2021 if the economic recovery accelerates. This could produce capital losses on longer-term maturities, Vaselkiv says. He suggests that investors may want to consider high yield bonds and floating rate bank loans, which have prices that are less sensitive to changes in interest rates.
Tax-exempt state and local municipal bonds also appear to offer attractive opportunities for individual investors, especially those in the top federal tax bracket. Most issuers remain in good fiscal shape despite the pandemic, Vaselkiv notes. Meanwhile, the hunt for higher yields has drawn nontraditional investors into the market, boosting demand for taxable muni securities, such as those issued by local municipalities.
Although the 2020 elections raise significant short-term issues for U.S. and global capital markets, we continue to believe that most investors would be best off focusing on their long-term investment strategies and avoiding major changes based on political events.
Historically, U.S. equity market performance has been relatively consistent across presidents from both parties, Linehan notes, suggesting a long-term perspective is most appropriate. The potential costs of shifting in and out of asset classes in response to shorter-term events can be steep, Vaselkiv notes.
“It’s easy to get consumed by elections,” Linehan says. “But we think having a balanced approach to investing, and being thoughtful and careful, could be critical to long-term investment success.”
- Mark Vaselkiv, CIO, Fixed Income
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
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Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. All charts and tables are shown for illustrative purposes only.
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