In a Nutshell

Traditionally, new presidents get a 100-day “honeymoon” through April, but before we get too far into the new Biden administration, it’s worth noting where things stand with last month’s presidential transition. The previous four years, I believe, were remarkable for the capital markets. The Dow Jones Industrials were up 28.5 percent in 2017, the best first year after ever following a presidential election year.  Even after COVID-19 struck in early 2020 the market eventually recovered nicely.  Major indexes rose between 55 percent (Dow) and 139 percent (NASDAQ) over the previous four years; gold and silver also gained a respectable 63 percent in that span.

Directly after his inauguration the Biden administration released a list of executive actions, some of which are sure to create market headwinds. The repeal of the Trump tax cuts and the imposition of a mandatory $15 per hour wage minimum would likely have the broadest negative impact on investor sentiment.  However, extensions on student loans and evictions, rejoining the Paris Climate Agreement, the reversal on travel bans on certain Muslim countries, reinstating the Iran nuclear deal, granting amnesty for 11 million immigrants and the expansion of the Affordable Care Act, while not universally popular, may not impede the market much in the near term.  Collectively, however, they raise serious questions about such directives and how to pay for all of the above.

The Federal Open Market Committee opted to leave rates unchanged, as expected, at last week’s meeting. They also left guidance on asset purchases unchanged, as expected. The Fed will continue to grow its holdings of Mortgage Backed Securities by at least $40 billion a month and of Treasuries by at least $80 billion a month. On balance, there are fewer changes in Fed’s statement than in any since the China pandemic struck in late 2019.  Nevertheless, the tone is darker.

Since last spring, Fed participants have on occasion worried about setbacks in the recovery, but this is the first time they have actually seen a significant slowdown in the recovery’s pace. On top of that, after months of commentary with the theme, “Things are bad now, but soon we will have a vaccine,” the theme now is, “We have a vaccine, but there are still significant risks.”  In fact, getting the vaccine to higher risk citizens continues to be much slower than anticipated, with many people over age 65 still not having confirmed vaccination appointments.

The market cares deeply about tax policies, as well as campaign promises that have a tendency to morph into different-looking policies when they are finally implemented.  The national debt ended 2020 at $27.75 trillion and is likely to top $30 trillion shortly. Unfortunately, it looks like our nation’s debt will keep rising at a rapid clip (considering proposed pandemic-related relief stimulus and spending on infrastructure, health care and education).

If enacted, the Biden budget could elevate federal spending to 24 percent of GDP by 2030 (according to the Wharton study).  That would exceed the crisis spending spikes during the 2008-09 financial crisis as well as the 2020 pandemic, adding another $2-plus trillion in deficits to the spiraling national debt.  I think it’s safe to say that the dollar will trade lower and Treasury yields will rise further if our national debt-to-GDP ratio climbs to 130 percent.