One key risk is being overlooked by investors in the post-U.S. election stock market rally: the dwindling odds of a new pandemic relief package.
A fresh round of stimulus spending is unlikely to happen in the “lame duck” period before President Donald Trump’s administration comes to an end in January, said Charles Myers, chairman of financial advisory Signum Global Advisors.
After that, president-elect Joe Biden will have a fight on his hands pushing through his desired US$2-trillion-plus COVID-19 spending plan in a divided government.
“Stimulus is going to be very hard to get done on a scale that markets have priced in,” said Mr. Myers, who acted as an adviser to Mr. Biden’s campaign. “There’s a real sense of complacency about that in the equity market.”
Since the Nov. 3 presidential election, the S&P 500 Index has risen by 5.9 per cent, hitting a record high as recently as Monday. Over the same period, the S&P/TSX Composite Index has posted a 6-per-cent increase. Most of that upside came before the string of positive COVID-19 vaccine developments bolstered investor sentiment.
Evidently, global financial markets are quite happy with the election outcome. There are a few key reasons for that, said Mr. Myers, who was speaking at the national conference of the Portfolio Management Association of Canada on Tuesday.
First, with Republicans likely retaining control of the Senate, Mr. Biden will probably have to forget about some of the more transformational policies envisaged by the Democratic Party’s progressive wing.
“Divided government is viewed as the best outcome for the markets,” Mr. Myers said. “It means that Biden will have to govern in the centre.”
Second, while the corporate sector certainly enjoyed the extensive tax cuts Mr. Trump implemented, there is likely considerable relief over a potential return to a less chaotic political backdrop.
“It’s been hard for the C-suites of major companies to make medium- and long-term capital allocation decisions, given the erratic policy-making out of the White House,” Mr. Myers said, citing Mr. Trump’s tendency to wage trade disputes via Twitter or his often combative approach toward U.S. allies, Canada included.
A third bullish force is the recent optimism over additional fiscal stimulus. The federal government has not initiated a major pandemic-related spending package since the US$2.2-trillion CARES Act was passed in March.
Last weekend, Mr. Trump, while still not conceding the election, tweeted his desire to pass a relief bill before he would be expected to leave office. Behind the scenes, Mr. Biden has been pushing for the same thing, Mr. Myers said.
“When the two sides sit down to try to negotiate this is when things will fall apart,” he said. There is considerable distance between the two parties in terms of the amount of spending to be involved, he added, and Democrats are unlikely to settle for a more modest bill. So the whole matter likely gets put off for the next administration to tackle.
Mr. Biden had hoped to support a new round of COVID-19 relief spending with increases in both corporate and personal taxes, Mr. Myers said. But that plan relied on Democrats gaining control of the Senate. That could still happen in the Georgia runoff elections in January, but it’s generally considered a long shot.
“Tax increases are pretty much dead on arrival in a Republican Senate,” Mr. Myers said.
The COVID-19 crisis in the United States, meanwhile, is getting worse, with the U.S. death toll nearing 250,000. A White House coronavirus task force report leaked this week said there is “now aggressive, unrelenting, expanding broad community spread across the country, reaching most counties, without evidence of improvement but rather, further deterioration.”
With the country facing a grim winter, the probable absence of new fiscal firepower is not yet priced into stock markets, Mr. Myers said.
“Everyone wants to focus on vaccines, and on a very big economic recovery next year,” he said. “But we are probably going to go through our worst period of COVID over the next three months.”
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Tim Shufelt