20/20 Election Still Blurry
Douglas Porter, CFA, Michael Gregory, CFA and Sal Guatieri
While the results still hang in the balance and could swing in a different direction, it currently looks like Joe Biden will become the 46th President of the United States, the Republicans will hold onto the Senate, and the Democrats will keep control of the House with a slimmer majority. However, ballots are still being counted in several states and no major media outlet has yet to make an official call on the outcome.
Here are the election results as of late-Friday morning, according to the Wall Street Journal:
What is clear is that recounts will occur in several states with razor-thin margins, and legal challenges (already launched by the White House) are sure to mount, meaning that the final results may not become official for several weeks.
Based on current results, and assuming Joe Biden is inaugurated on January 20 and the Republicans hold onto the Senate, there may be no need to change our U.S. economic call of 4.0% growth in 2021. The continued split in legislative control would likely result in a smaller stimulus deal (closer to $1 trillion) that extends pandemic relief programs for the unemployed, hard-hit businesses, and states struggling to balance the books. The emergency UI benefit programs that were set to expire at year-end will likely be extended, and the Paycheck Protection Program that provides forgivable loans to small and mid-sized companies retaining staff could be reopened, though possibly not until after Inauguration Day. With the country reporting a record number of daily COVID infections, the need for additional support is mounting, although new restrictions have been minimal so far (and largely contained to Illinois). Under a split Congress, Biden may be tempted to push for curbing subsidies to fossil fuel companies and rescinding the Keystone XL pipeline permit, but the Senate will likely push back. He might have more success with longer-term initiatives, such as investing heavily in green technology and electric vehicles to achieve net-zero emissions by 2050. His selection of cabinet members, particularly for Treasury Secretary, could be a flashpoint for investors. Even under a split Congress, executive orders can drive some shift in policies, as we saw with trade the last four years.
Conversely, if Congress remains gridlocked on a stimulus deal, we would need to cut our outlook. For instance, allowing the emergency UI benefit programs (currently supporting over 13 million unemployed) to expire at year-end would seriously dent the recovery, though likely not derail it due to the massive amount of excess savings (over $1 trillion) accumulated by households since February in response to earlier support programs.
In the event the Democrats sweep Congress and Biden is President, we would need to upgrade our forecast to account for potentially $2-to-$3 trillion of new stimulus (10%-to-15% of GDP) and a “Blue Wave” of spending on infrastructure, education (including free tuition for families making less than $125,000), affordable housing, health care (allowing workers with employer coverage to buy into a public health-care plan and using tax credits to reduce insurance premiums), child care (including free preschool), and environmental initiatives. In fact, passage of the House’s original HEROES Act and its $3.4 trillion price tag would not be out of the question, though some lawmakers will question the need for a plan that’s even larger than the first four bills when the economy has regained much of its loss. The boatload of spending would be partly blunted by Biden’s plans to raise the corporate tax rate by 7 ppts (and double the minimum tax rate on overseas income of U.S. multinationals), hike personal income taxes for top earners (above $400,000, by restoring the 39.6% marginal rate from the current 37% and introducing a 12.4% Social Security tax), and double the federal minimum wage to $15 (which could discourage hiring in already hard-hit industries, such as food services and travel). Some modest easing in trade tensions with U.S.’s allies would support business sentiment, though Biden does not plan to reverse the current tariffs on China. He is open to the U.S. joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Increased immigration levels (via citizenship for 11 million undocumented migrants and accepting more refugees) would support both household formations and the ability of companies to match skilled workers with vacant positions.
Of course, the election results aren't final yet and the outcome could swing in a different direction. Should Trump retain the White House, we could see four more years of generally business-friendly policies, including lighter regulations and a stable tax climate. This would be tempered by ongoing trade tensions; in particular, a Phase 2 deal with China seems unlikely in the current hostile climate, and Phase 1 (in which China pledged to buy more U.S. goods) could even get derailed.
Treasuries have rallied on the lower odds of a large stimulus bill that would pump both the economy and budget deficit, and amid safe-haven demand stemming from increased political uncertainty. We still expect long-term rates to drift modestly higher if a moderate fiscal deal is reached and the economic recovery stays intact, though Treasuries could retain a bid until control of the Senate is known in early January.
Equities have also jumped on the prospect of calmer trade relations, as well as the lower chance of a major policy shift on taxes or regulations. In particular, technology, financial, pharmaceutical and energy shares have jumped on expectations that a Republican-led Senate will nix any sweeping regulatory reforms, including anti-trust legislation on tech giants and price controls on drug companies. Alternative-energy firms and businesses benefiting from increased infrastructure spending are likely to benefit under a Biden presidency. BMO’s Chief Investment Strategist Brian Belski remains bullish on the long-term trend for equities, though markets could be volatile if the election results are contested.
After initially firming on increased uncertainty, the U.S. dollar has weakened on a flight toward risk assets and lower odds of a large fiscal deal. We expect the dollar to generally trend down next year as the economy recovers and the currency loses its safe-haven lustre.
President Trump has publicly and frequently criticized Fed Chair Powell in an unprecedented fashion. Powell’s term as Chair ends on February 5, 2022. If Trump wins, it appears (on the surface) that the President will not re-nominate him. Powell is also a Republican, the main reason proffered by Trump as to why he did not re-nominate (Democrat) Janet Yellen back in 2018, so a Biden victory might put his re-nomination in jeopardy as well. Note that Powell was nominated to the Fed’s Board of Governors in 2012, during the Obama Administration, as a compromise candidate to appease the Republican-controlled Senate (his tenure on the Board lasts until 2028).
However, likely lifting Powell’s re-nomination odds in either scenario, the FOMC’s recent modifications to its monetary policy framework have now, arguably, positioned future policy in its most politician-friendly stance ever. The Fed’s congressionally-mandated goal of full employment is now being defined so that there will not be any pre-emptive tightening of policy as the jobless rate falls towards and below the natural rate (FOMC median projection of 4.1%), unless inflation is an obvious problem. Meanwhile, toleration of the latter has been lifted with the goal of price stability now being defined as inflation that averages 2% over time. The FOMC is already targeting inflation that is “moderately above 2% for some time.”
Implications for Canada
While the results still hang in the balance, we can draw some preliminary conclusions on implications for Canada from the U.S. election, especially given the absence of a Blue Wave. This list is not meant to be exhaustive, but instead highlights some of the bigger potential impacts on Canada, roughly ranked in order of importance and certainty.
Trade: On bilateral trade, the key is whether there will be less uncertainty on the trade file, with the USMCA in place, and a split Congress. Biden’s Buy American policy would weigh on many sectors, while Trump has menaced specific industries with tariffs (e.g, steel and aluminum).
On the multilateral front, a much more constructive international backdrop would be expected under Biden, after the Trump Administration almost paralyzed the WTO. Biden has also discussed the possibility of the U.S. joining the Trans-Pacific Partnership (something the U.S. initially spearheaded).
With China, again, the tone and tactics may change but we suspect that the fractious U.S./China trade relations will persist. However, the temperature will probably be dialled down a few notches from the drama of the past two years, should Biden emerge victorious. On tactics, Biden would be more likely to enlist the support of other major economies in a unified effort to challenge some of China’s trade and industrial policies.
Energy: The energy file is probably the area that revealed the starkest differences between Biden and Trump and has large implications for Canada. Clearly on the downside for Alberta, is Biden’s blunt suggestion that he will pull the permit for Keystone XL. Biden’s many other proposals on the energy front are unlikely to survive a split Congress.
Stimulus & Growth: As outlined earlier, the election outcome points to a smaller stimulus deal, likely regardless of who wins the Presidency. Overall, this should modestly support near-term U.S. growth, with positive implications for Canadian exports and related domestic activity. In a separate area, U.S. policies on immigration could shift substantially in the event of a Biden victory to much more openness. It is debatable to what extent this directly affects the Canadian outlook, but if Biden undoes some of Trump’s policies, it could be more challenging for Canada to hit its new, higher immigration targets and/or retain talent that would otherwise be moving south. Note that the strongest years for non-permanent resident inflows to Canada were 2017 and 2018, with at least two forces at work—a more open Canadian immigration policy at the same time that U.S. was closing its doors. A Biden win could shift the balance back at least somewhat, even if takes a while given the pandemic realities.
Taxes: With the Senate result still in doubt, but leaning to a Republican hold, this is one area that may now see very little change. Biden was quite clear in his call to lift the corporate tax rate 7 ppts to 28% from 21%, but the Senate would likely block this. On the surface, this doesn’t have many direct implications for Canada. However, with government finances fundamentally weakened by the massive costs of dealing with the pandemic, there will be a focus on new revenues in the years ahead. And, it’s safe to say that the absence of tax hikes in our closest competitor will leave Ottawa with little room to manoeuvre. Moreover, we would point out that the Finance Minister’s recent strong defence of ongoing fiscal support should apply every bit as much to keeping taxes in check as it does to keeping the spending taps open.
Exchange rate: We believed that the underlying trend in the U.S. dollar was likely to be lower, regardless of the election outcome. We maintain that view, with the muddied result, combined with the likelihood of only a small fiscal boost, not a dollar-friendly outcome longer term. The combination of a firmer global recovery over the next year, some of the less business-friendly aspects of the Biden proposals now unlikely, and a moderate rebound in oil, we look for the Canadian dollar to firm slightly in 2021. We continue to look for the currency to finish next year near $1.30 (or just under 77 cents (US)).
Joe Biden’s Platform
Donald Trump’s Platform