Biden’s policy agenda
President Joe Biden has expressed a preference for bipartisan legislation, but parochial politics—on both sides of the aisle—has become increasingly entrenched in the nation’s capital. And the partisan divide is just one of the challenges facing the new president. Biden faces opposition from the GOP on myriad issues but is also constrained by the need to mediate the interests of the progressive and centrists wings of his own party. Democrats hold razor-thin majorities in both houses of Congress, which will require a rare degree of unanimity to pass significant legislation. We expect the Biden administration to focus on COVID-19 relief first and foremost, followed by infrastructure investment. A tax bill is likely later in the year and could be paired with provisions related to infrastructure investment to make the overall legislative package more appealing. The size and scope of any tax provisions will be constrained by the need for harmony within a fragmented Democratic conference.
The acronym POTUS (President of the United States) came into use during the late 1800s by telegraph operators and is now commonly used in media. Joe Biden is the 46th POTUS.
President Biden’s decision to call for a larger, USD 1.9 trillion stimulus spending package reflects the urgency he places on addressing the pandemic before its detrimental effects on the US economy constrain his ability to implement other initiatives. The pace of the US economic recovery, and the performance of risk assets, depends largely on the speed and effectiveness of the vaccine rollout.
There is broad bipartisan support for the concept of infrastructure investment, but members of Congress rarely agree on how to pay for it. The speed with which projects are undertaken will be a principal focus for the new administration; however, we believe climate change and environmental protection will be the unifying theme of any infrastructure investment program.
Narrow majorities in the Senate and the House will likely limit the scope of tax legislation. An increase to the maximum marginal tax rate for individuals and to the corporate income tax rate are probable, though the latter may be phased in. We expect revenue from tax increases will partially offset the cost of the infrastructure program, with borrowing to make up the difference.
Trade and commerce
We expect President Biden, who has been supportive of multilateral trade agreements in the past, to place a renewed focus on strengthening traditional alliances, rather than using trade policy as an overt foreign policy tool. Global trade disputes with other nations will linger, but the new administration will focus on reducing tension and seeking negotiated settlements.
The national response to the pandemic has temporarily displaced arguments over the future of the US healthcare system. Another robust debate is inevitable, but legislation may have to await the inoculation of most Americans against COVID-19. Until then, we expect the Biden administration to focus on the immediate challenges of accelerating vaccine distribution.
We anticipate a more stringent regulatory regime, as well as an increase to the size and scope of enforcement actions. We believe investor protection will be the principal focus, and that banking industry regulations will be more strictly enforced. Greater scrutiny on how the financial services industry serves the less affluent and more vulnerable populations seems likely.
Investors are holding steady after the election and vaccine news
According to the 4Q 2020 UBS Investor Sentiment survey, more than half of US high net worth investors feel optimistic about the economy over the next year, and 59% think the US election result will be good for the economy. They say COVID-19, stimulus, and infrastructure should be Biden’s top priorities.
Priorities for Biden’s first 100 days
And the next four years
Takeaways for investors
The inauguration heralds a fundamental shift in public policy. Deregulation gives way to more regulation and stricter enforcement. Unilateral action in foreign policy yields to multilateralism and traditional alliances. The allocation of capital for new investments will be influenced more profoundly by government incentives and mandates. Some industries, such as legacy energy, will face formidable obstacles. Others, such as renewable energy, are poised to benefit. Nimble investors who can reposition their portfolios to take advantage of the public policy shifts will be the long-term beneficiaries.
The Biden administration’s policy agenda will affect many sectors of the economy, with specific implications for individual assets and securities. But at a macro level, the consequences will be driven predominantly
by the net fiscal impulse to the economy, weighing increased spending including the amount, timing, and exact forms versus the potential drag from higher taxes. This will have implications for the growth outlook in 2021 and 2022, as well as over the long term if the policies are able to stimulate private sector investment and increase productivity growth. But perhaps more important for asset allocation are the implications that the policies will have on actual inflation and inflation expectations.
With the Biden administration focusing first on a response to the pandemic, and suggesting that an infrastructure bill would follow, we are inclined to believe that tax increases are less likely to be a drag on the economic recovery in 2021. President Biden’s clear preference is to pass fiscal spending legislation with bipartisan support from Republicans, but that’s not guaranteed at this time. His spending priorities are also a combination of COVID relief support and infrastructure investment. However, the immediate priority is the former, and the size of the final stimulus bill will depend on the progress of congressional negotiations.
Financial markets already seem to be expecting an outcome in this range, although they’re still likely to react positively again if Congress appears poised to act. Additional upside in equities, a continued performance rotation favoring small- and mid-cap equities and cyclical sectors, and a gradual rise in longer-term interest rates are likely if the expected fiscal spending materializes.
Our current House View incorporates the aforementioned base case. Perhaps the more interesting asset allocation consequences stem from alternative fiscal spending scenarios, which could drive more sizable market moves.
Failure to pass another fiscal package by 2Q, and the prospect of not passing one at all
This is a low probability because the Democrats control both the executive and legislative branches of the federal government. But it’s also not zero because they have no margin for error in the Senate. In this outcome, longer-term interest rates would likely decline, at least temporarily, to their pre-Georgia Senate election levels. For equities, the momentum of the rotation trade would likely stall, but we wouldn’t expect more than a modest pullback in the overall market.
Immediate fiscal package exceeds USD 1 trillion
This would increase the chances of another sizable fiscal spending bill later in 2021 focused on infrastructure investment with a climate change emphasis. The prospect of higher growth, inflation, and rates would benefit value stocks, which could finally experience a sustained period of outperformance versus growth stocks. Smaller size segments within the equity market would likely also widen their recent gains versus large-caps.
The fiscal outlook becomes more uncertain beyond 2021, with a wider range of possible outcomes. In the base case, the fiscal impulse returns to more normal levels, while taxes are likely to increase (corporate income, personal income, and possibly capital gains). From an equity market perspective, a potential increase in the corporate tax rate would have the biggest impact. We expect the corporate rate to rise from 21% to 28%. Still, assuming another year of above-trend GDP growth and a phasing-in of the higher rates, earnings growth should still remain positive.
Markets move very quickly to price in potential policy changes, and we think they currently reflect our expectations for fiscal policy this year, to the extent that their impact can be isolated from a multitude of other factors. Consequently, our current House View asset class preferences constitute our recommendation for how to tactically position investment portfolios for the likely Biden administration policy agenda. These include a preference for equities generally, and within them emerging markets and developed market small- and mid-cap equities, while also favoring cyclical sectors including US financials and industrials.
While markets appear to have incorporated the broad strokes of a “light” Blue Wave into current prices already, there is still some uncertainty about the details of what becomes law. Therefore, we still think there are some pockets of opportunity that are leveraged to the policy outcomes we expect. In our POTUS 46 stock list, which you can request from a UBS advisor, we highlight stocks that are poised to benefit from the following policy actions:
After years of false dawns, it appears that the prospects for infrastructure spending are finally improving. Companies leveraged to traditional infrastructure spending, such as steel and aggregate companies, stand to benefit. There could also be incentives for “nontraditional” infrastructure such as broadband access and 5G rollouts.
Democrats will likely take the opportunity presented by their unified control of government to enact policies that promote the decarbonization of the economy. Incentives for electric vehicles, renewable power, clean energy (such as hydrogen), energy efficiency, and electric grid upgrades should boost the earnings outlook for a range of companies and their suppliers. Many stocks leveraged to these themes have already registered impressive—if not eye-popping gains. We therefore choose to focus on companies with more reasonable expectations and avoid those whose valuations are harder to justify.
The semiconductor industry lies at the heart of the tech race between the US and China. It is possible that the Biden administration pursues policies that encourage domestic semiconductor manufacturing.
Higher interest rates
One of the primary policy objectives of the Biden administration will be a faster economic recovery as the pandemic winds down. Many of the policies outlined above will inject money into the economy, which should lead to faster economic growth and higher interest rates. As a result, we also highlight stocks that are poised to benefit from rising interest rates, such as financials. We think the positive impact of higher rates will offset any modest drags from tighter regulation.