Incoming US presidents often look to set ambitious targets for their first 100 days in the Oval Office. Historically, this period has enabled some new presidents to capitalise on the recent election momentum victory and deliver swift policy action. For others, it has provided somewhat of a reality check as challenges emerge that were less evident on the campaign trail. As president Biden’s term reaches this milestone, what have investors learned so far?
First, this administration is a big spender. Despite a large overhang of government debt and a slender majority in both arms of Congress, the new administration wasted no time in delivering a huge fiscal package.
Its impact must not be underestimated. Around 5% of GDP will hit the US economy by the end of September, and another round of stimulus checks is adding to the large pot of savings accumulated over the past year. When factoring in other tax credits, the average US household with children will receive $6,660 in direct aid as a result of the latest bill. With vaccine rollout progressing well, booming March retail sales figures point to a US consumer that is eager to make up for lost time.
Infrastructure spending a longer battle
Infrastructure spending is the Democrats’ next priority. Relative to the speedy passage of the Covid relief, this will be a much longer battle. Even if the Democrats use the budget reconciliation process (thus removing the need for support from across the aisle) compromise within the Democrat party will still take time to achieve. The profile of spending will also look different – whereas the latest bill is similar to a sugar rush, infrastructure spending is better compared to a complex carbohydrate that takes much longer to be absorbed into the economy’s bloodstream.
The way that the spending is paid for will be a major factor in how the final bill is received by markets. Initial proposals look to recoup the cost of infrastructure spending via tax hikes, most notably by increasing the corporate tax rate to 28%. While we do expect upward pressure on taxes over the coming years, the final form of the bill will likely contain more moderate changes than currently proposed, particularly with the 2022 midterm elections drawing into view.
‘Greening’ and reviving the economy
President Biden is also committed to tackling climate change and therefore provides a like-minded ally to European leaders. The latest pledge to cut US emissions in half by 2030 has underscored the desire to move quickly. At least $400bn of the infrastructure proposal is allocated for direct climate efforts, including clean energy tax credits and major investment in electric vehicle infrastructure. The president appears eager to kill two birds with one stone, by both “greening” and reviving the economy simultaneously. 40% of the planned investments in clean infrastructure and climate will target disadvantaged areas in the US.
Ahead of November’s COP 26 climate summit, the lines between climate policy and US foreign policy are increasingly blurry. This is an intentional choice – just a week into his term, Biden signed an executive order that vowed to put the climate crisis at the centre of national security. In the context of the US–China relationship, reducing carbon emissions is one of the few issues on which both parties have agreed to cooperate. Outside of climate change, the intense rivalry between Washington and Beijing remains evident. Yet crucially for investors, there are few signs so far of a return to the tit-for-tat tariff war that weighed on business confidence in 2018 and 2019.
Rotation has more room to run
Markets, like the president, have had a lot to digest over the past 100 days. It’s been a torrid period for fixed income, with US Treasuries delivering their worst quarterly return since 1980. As the strong rebound in growth shifts from forecast to fact, there is scope for yields to push higher. US stocks have been remarkably resilient to the repricing in the bond market, although this has influenced a change in market leadership under the surface. We see more room for this rotation to run from last year’s leaders to laggards, with further upside to earnings estimates in cyclical sectors.
Going forward, investors will hope that US policymakers can achieve the goldilocks scenario: an economic rebound that is hot, but not too hot. Generous spending programmes are a popular tool for politicians, and in the context of a post-pandemic recovery, they are also warranted. Yet tough choices will lie ahead if a boom/bust scenario is to be avoided. The appropriate policy mix for the full four-year term may look quite different to the policy stance of the first 100 days.
Hugh Gimber is global market strategist at JP Morgan Asset Management
