November 2020 -The election is now over and while not officially finalized, we are working off the assumption that Biden has won. Following the election, the stock market rallied as it appeared that a Democrat Presidency would be met with Republicans retaining the Senate and picking up seats in the House. This split Congress scenario will likely result in a continuation of many of the current policies, namely lower taxes that have been bullish for stocks. However, as the votes were tallied, the scenario changed somewhat as Georgia will have a runoff for both its Senate seats in early January. This raises the possibility of Democrats taking control of the Senate. We believe this outcome represents a risk to the market as tax increases on personal income, corporations, social security, and capital gains, are a possibility once again. As a reminder, Biden has proposed eliminating the Trump tax cuts and/or raising income tax on individuals making over $400K, taxing income over $400K for social security (currently caps at $125k), raising the corporate tax to 28% from 21%, and raising capital gains tax to the personal income tax rate from the current 25%. Potential activities that would offset some of the tax-driven economic headwinds are the prospect of increased government spending on infrastructure, stimulative by nature, as well as additional fiscal support for businesses and consumers impacted by the virus. Come January, we expect to have a clear picture as to the potential tax changes.
With respect to the Technology sector, stocks moved higher after the election and we believe that Technology stocks rose for a variety of reasons. First, it is less likely a Biden administration will try to punish social media companies with respect to free speech concerns. Section 230, which shields these companies from lawsuits stemming from free speech posts made on their platforms, is likely to remain intact and thereby removing any potential overhang. However, we do think there could be increased anti-trust scrutiny for some companies if it is deemed that large tech firms are growing at the expense of small business. Second, if there is another shutdown of the U.S. economy, tech companies are likely to continue to benefit as they did during the spring and early summer shutdowns. Lastly, the prospect of increased regulation and taxes could temper growth, resulting in interest rates remaining at zero. High growth technology stocks have historically fared better in a low interest rate environment as low rates make future earnings more valuable.
With Senate control, there is also the expectation of increased regulation, particularly of the energy industry. Biden has shown support for a ban on fracking, although we do not believe a ban is likely. It is also not clear if this would be only on Federal land or across the board. The former would be only moderately harmful to energy supplies and would likely drive prices up modestly, the latter would have a much more severe impact.
The Biden administration is also likely to take a much lighter approach to trade with China, seeking to garner international support and reversing the unilateral tariffs that were implemented by the current administration. It is unclear at this point if a different approach would be more successful at reducing intellectual property theft and opening Chinese markets to U.S. companies. However, an elimination of tariffs would be a good for certain industries that rely on goods imported from China and potentially for agricultural businesses that have been stung by retaliatory tariffs.
Healthcare is another big focus area. Should Democrats gain Senate control we believe Obamacare will be here to stay, which would be positive for the Healthcare sector as more insured individuals implies higher usage of healthcare products and services. The other major campaign point of expanding a Medicare option to all people would have more mixed results in our view. Certainly, a higher number of insured individuals is a positive but, potential price controls, reimbursement cuts, and a crowding out of private insurance are negatives.
Separately and just a few days after the election, Pfizer announced that its COVID vaccine was 90% effective, a result we expected given the delay in accumulating positive COVID tests beyond the minimum requirement. We believe this is being viewed as a “light at the end of the tunnel” for COVID lockdowns/restrictions even though cases are currently hitting new highs. In addition, Moderna announced it has accumulated enough positive cases to trigger a review of its vaccine. Given that the Moderna and Pfizer vaccines are similar, we would expect a positive announcement shortly. Although vaccines will not likely reach the masses until Q1 2021 and will take time to work through the population, the outlook for 2021 has greatly improved. As we have discussed prior, with this announcement we have seen the reversal of the “at-home” trade that has propelled many names to atmospheric levels, such as Zoom and Peloton. While we don’t expect economic conditions to change overnight, the out-year growth rates will likely be pared for many of these stocks. Conversely, many stocks that were being hurt by COVID (e.g. medical device, restaurants, retail, and travel stocks) should see some relief once the vaccine is readily available.
All in all, political and COVID conditions remain in flux and could change at any time. We remain focused on positioning portfolios for the long term regardless of near-term issues and invest for both good times and bad. We believe we have the right mix of stocks that will do well if COVID conditions worsen and stocks that will do well in a recovery scenario.
Chris Sessing, CFA®
Chief Investment Officer