Pollsters’ forecasts of a “blue wave” in 2020 did not fully materialise, though, as the Democrats failed to overturn the Republican majority in the Senate, the upper house of the US Congress. This matters because a majority of Senators need to approve legislation, potentially hamstringing what Biden can achieve in the first two years of his presidency.
Here, we explore why investors have taken the acrimonious vote in their stride.
During the election campaign, Joe Biden pledged to raise tax on companies and the highest earners in order to fund more government spending. Without a Democrat majority in the Senate, it looks unlikely that these plans will be implemented in full as the Republican party tend to oppose tax rises.
Nonetheless, we can probably expect continued fiscal stimulus. Although not all Biden’s proposals, such as higher welfare spending, would gain congressional approval, it is unlikely that an opposition-controlled Senate would reject government spending that supports the national economic recovery from COVID-19.
Fiscal stimulus would boost US economic growth in 2021, especially if policies like Biden’s proposed tax relief for low and middle-income families target help for the less well-off. This is because poorer members of society spend a very high percentage of their income on goods and services, supporting businesses. This leads to what economists call a higher ‘multiplier effect’ of government spending.
The long-term price of larger fiscal deficits is, of course, more government debt. The deficit in 2020 will be approximately US $3.3 trillion, equivalent to 16% of US gross domestic product (GDP). When interest rates are very low, as they are today, deficits are made affordable by low repayment costs. However, if they were to rise in the future, higher interest repayments could strain the nation’s finances, crimping US economic growth.
‘Building a cleaner future’
On 4 November, President Trump formally withdrew the US from the 2015 Paris climate agreement under which countries committed to curtail greenhouse gas emissions and act to limit rising global temperatures.
It is in the president’s gift to re-enter the agreement, however, meaning the US could again become a signatory in early 2021, as candidate Biden has pledged.
Indeed, it could prove the first step towards his plan to target net zero emissions by 2050. Biden announced a climate plan that would involve spending US$2.0 trillion over four years to significantly increase the use of clean energy. Part of the plan focuses on infrastructure – one of the few areas where Republicans and Democrats agree there is a need to invest to address long-term underinvestment.
Again, the reality of a divided Congress makes it unlikely that the most ambitious of these policies will come to pass. Regardless of what the Senate will or will not approve over the next four years, though, companies in the US are already investing heavily in renewable energy and green technologies. After all, solar and onshore wind generation are now competitive with fossil fuels, even without subsidies.
Healthcare has been one of the sectors of the US economy under the microscope during this election, due to the contrasting policies of rival candidates.
Biden is in favour of both lowering the eligibility age for federal insurance programme Medicare from 65 to 60, and launching a public health insurance plan to compete with the private sector.
While such measures would expand the number of Americans with medical insurance cover, they could shake up the US healthcare sector, which accounts for 18% of US GDP. However, without Democrat control of the Senate, major changes look unlikely.
Trade and emerging markets
While Trump’s departure from office should reduce the anti-China rhetoric from the White House, it does not necessarily spell a departure from significant tensions between the world’s two largest economies. To win back blue-collar voters in swing states in the US Mid-West, the Democrats have adopted a more protectionist ‘made in America’ stance.
Trade aside, Biden’s election could foster a return to a more multilateral approach to global development that could see international institutions, like the International Monetary Fund, better empowered and resourced to support lower income countries. This would be positive for emerging market economies, especially those struggling in the face of the pandemic.
A key variable for emerging markets is presented by the yields on US government bonds. This is because they help determine the cost of borrowing for emerging market governments, since global investors generally expect higher prospective returns on lending to them.
If US government borrowing continues to soar, we might expect the yields on US government bonds to rise over the longer term, since bond prices could go down as supply increases, and bond yields move inversely to prices.
Having said that, bond markets are complex and there are many factors at play. It is likely though that without a Democrat majority in the Senate, US government borrowing – and so bond issuance – will be less than it might have otherwise been. This is probably positive for emerging markets.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
M&G are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.
The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.