Welcome to 2021. Apparently this year is going to start where 2020 left off, but with a touch of insurrection added to the mix. Wednesday was undoubtedly surreal, and on top of what we saw on T.V, it proved to be the deadliest day to date in the U.S. since the CVOID crisis started. But none of this could keep the market down. On Thursday the NASDAQ had the best day in months, as you can see below.
Obviously, the other big political event of the week played a part. The senatorial elections in Georgia fell to the Democrats, and Biden will now enjoy the same single-party government that was enjoyed initially by the last four Presidents – Clinton, Bush, Obama and Trump. But by some measures, the Democratic Party’s current mandate is amongst the narrowest in 60 years (chart below): Biden won the White House with only 51% of the popular vote (compared to Obama’s 53% in 2008); the Democrats’ House majority is only 11 seats; and their control of a 50/50 Senate only comes via the tie-breaking vote of Vice President-elect Harris.
But regardless of the margin, the market is fixating on another round of fiscal stimulus above and beyond the $900bn plan that was just passed. For example, take the view from Goldman:
‘As we recently outlined, we would expect a Democratic Senate majority to allow for greater fiscal policy changes. This would include additional fiscal stimulus in the near term–we have penciled in $600bn (2.7% of GDP) in additional stimulus under this scenario–followed by a limited amount of tax increases and spending increases later in the year.’
On-top of this Goldman sees another $150bn of unemployment benefits, bringing the total to $750bn, split as follows:
J.P. Morgan is of a similar view. Their guess is another $900bn of spending. Note their comments below about the once-a-year budget reconciliation process:
‘The cornerstone of any fiscal package will probably be another round of stimulus checks. Senator Schumer, likely the next Senate majority leader, has already said that $2000 stimulus checks are a top priority after Inauguration Day. If this looks like the House version that passed in late December, this would mean a $1400 check on top of the $600 checks that recently were part of the Response & Relief Act. The House bill would have doled out $464 billion—a massive injection into consumers’ pocketbooks which should ensure a very boomy year for consumer spending. A consistent Democratic priority during the pandemic has been federal aid to state & local governments. While this priority was mostly rebuffed in the Response & Relief Act, we expect it will be included in the next stimulus…While some of these programs have bipartisan support, the aid to state and local governments may prevent passage with the 60 votes needed to overcome a filibuster, and so we expect any fiscal package will likely be passed under the budget reconciliation process. This implies that other Democratic priorities such as a public option for Obamacare or more infrastructure spending would need to wait for next year to use this once-a-year spending opportunity with a simple Senate majority.’
(Quick background on the Budget reconciliation process – it allows tax and spending changes if there is no change to the deficit after a ten-year time frame, which is why some Trump tax cut provisions sunset within 10 years. Also, no changes are allowed to payroll or social security taxes, which are a big component of the Biden plan – $870 bn out of $3 trillion in new taxes. Finally, tax and spending changes must be “incidental” to regulatory policy and not contingent on them.)
The bottom line is that economists are falling over themselves to revise higher their 2021 growth estimates. The table from J.P Morgan below is but one example. If they are close to being right we could see some awfully strong growth numbers in 2021.
But all of this is guesswork at this point in time. Conservative Democrat Joe Manchin of West Virginia (who wants to win re-election in a state President Donald Trump won by 39 points) was out Friday saying he’d oppose sending new checks to people. But it’s not clear this view is fatal to such a move as some GOP senators have publicly backed such a policy.
At this point we probably have to assume that corporate and individual taxes will go up modestly at some point in the second half of 2021 or early 2022. This will hit corporate earnings. To quote BCA:
‘…triggering a one-off drop in earnings per share of about 11%, according to our US Equity Strategist Anastasios Avgeriou (table below). But it also brings more proactive fiscal policy. Since the Democrats project larger new spending programs financed by tax hikes, the big takeaway is that the US economic recovery will gain momentum and will not be undermined by premature fiscal tightening.’
It is worth noting that outside of fiscal policy and Cabinet/Supreme Court nominations, other legislation would likely need 60 votes to pass in the Senate. For example, more than one Senate Democrat has already publicly opposed eliminating the filibuster, which probably means this legislation is DOA. Thus, bipartisan support would still be necessary to pass legislation on issues like infrastructure, a minimum wage increase, tech regulation, and environmental policies.
And for what it is worth, the market is latching on to this idea. At the margin you get more front-end loaded fiscal spending (and modestly higher taxes that are back-end loaded) without any radical legislative changes. This may or may not prove to be the case, but it is certainly the narrative that investors used to bid stocks higher this week.
Charts We Found Interesting
1. Testing dipped around the holidays, but case counts and mortalities are surging again.
2. By this measure the U.S. doesn’t look too bad in terms of vaccination rates, but the numbers are strikingly low pretty much everywhere.
3. The U.K is struggling with surging infection rates as well.
4. Friday’s payrolls report was weak. 140K jobs were lost in December, far worse than expected. The bulk of the losses were centered in the hospitality sector which shed 372,000 employees. The good news is that most other industries saw modest job growth and the overall unemployment was stable at 6.7%.
5. From March to November last year personal savings were up an astonishing 173%. Incomes were up by $1 trillion and spending down by $500 billion = savings went up by $1.5 trillion!
6. Elon Musk became the richest man in the world this week and Tesla surpassed Facebook to become the 6th most valuable company by market capitalization.
7. A year-ago Tesla was trading at 3x sales. Today: 29x.
8. The times we live in!!
Have a good weekend.
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