Our Financial Market Outlook 2020 cited the biggest risk to the economy and financial markets as some type of exogenous shock. Boy, did we get a shock, Covid-19! To add gasoline to the fire, the shock arrived just in time for an extremely contentious election year. Now that the election chaos is behind us and several Covid-19 vaccines are in the first stage of administration to the public, is it calm waters ahead? Judging by the early days of the stock market rallies, it appears that is the conventional wisdom. We believe the realities are a more nuanced intertwining of political agendas for the direction of the country, public health policy for the rollout of the vaccines and the role of America in a global economy. The following is what we see as the Risks and Opportunities attendant to these issues.
It is not clear what portions of Operation Warp Speed will remain in effect. From the federal appointments announced to date, it appears we are seeing the substantial return of the Obama administration. That administration had three years to prepare for the rollout of Obamacare only to see their exchanges crash upon opening and remain problematic through 2016. If the vaccine rollout is misdirected or much slower than expected, that could lead to further restrictions on personal freedoms and economic activity.
The Obama administration was noted for an unprecedented increase in regulation over all aspects of business (2015 Federal Register of Records at a record 40,000 pages). We estimate the Trump administration’s reduction of regulations added as much as 1% to GDP growth. It was also that philosophy that in part enabled the record short time for development of the new Covid-19 vaccines. The Biden tendency to believe in big government solutions and to use regulation to effect legislation could be implemented quickly. These negative impacts could show up in the last half of this year.
President-elect Biden has promised to undo the Trump tax cuts. That will raise taxes on all personal incomes as well as corporations. That typically has a regressive effect on the economy and corporate earnings that could depress stock prices. However, we believe the need for a strong economy going into the 2022 mid-term elections will act as a deterrent for enacting any tax increases before an effective date in 2023.
There was much speculation about President-elect Biden’s cognitive acuity from his seeming to get lost in thought at certain times during the campaign. If there is substance to that concern, it could degenerate under the pressures of the office. If that condition is deemed to substantially impair his ability to execute the responsibilities of the office, he could be removed. That could lead Vice President Harris, now President Harris, to select a new Vice President similar to her political inclination. That could embolden an ideologue contingent to forge ahead with an agenda irrespective of the impact on the economy.
Given the strength of the economy coming into 2021, as evidenced by TAG’s December macro-economic research, there is arguably no need for further stimulus relief funds as proposed by the Democrats. The remaining economic drag that does exist could be relieved by easing of lockdown restrictions and reopening schools for in person learning, both of which have been hotly debated as to their consistency with the science and their effectiveness. We have long suspected that much of these restrictions were politically motivated to hamper the economy going into the Presidential election. If, after President-elect Biden’s swearing in, the Democratic Governors driving most of these restrictions change course, we estimate that could add as much as another 1% to GDP, which is already forecasted by Goldman Sachs and others to grow by as much as a whopping 5% in 2021. So, add to that a trillion dollars or more in a new relief bill and you could certainly create very overheated economic conditions and a serious rise in inflation above 2 %. That would typically put downward pressure on stock and bond prices.
January 12 2021
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Sources: Bloomberg.
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