Yes, we expect it will. Tomorrow, Joe Biden will be inaugurated as the 46th president of the United States, and while his party will only hold a slim majority in Congress, we believe his key policy initiatives will provide a supportive backdrop for risk assets in 2021.
The new president enters office under extraordinary circumstances after an eruption of violence at the US Capitol. After the surprising Democratic wins in Georgia’s Senate races, Democrats control both chambers of Congress. Although the Senate is split evenly between the Democrat and Republican caucuses, Vice President-elect Kamala Harris holds the tiebreaking vote, tipping the balance of power to Democrats. In the House of Representatives, the margin will also be narrow; in fact, the 11-seat Democrat majority is narrowest for either party in two decades.
With Democrats taking control of Congress, the prospects for a large COVID-19 relief package have improved. Just last month, the chances for a divided Congress, in which the Republicans control the Senate, seemed like the most likely outcome. Last Thursday, President-elect Biden outlined his vision, arguing that Congress needs to pass a $1.9 trillion package. The plan calls for fresh checks of up to $1,400 to be sent to nearly every American and provides a $400 per week federal supplement to unemployment benefits. Massive fiscal spending packages have previously been supportive of risk assets, as direct payments help boost consumer spending and, in turn, aggregate demand.
Biden’s plan also aims to accelerate vaccine distribution, with the goal of reaching 100 million vaccinations in his first 100 days in office. The vaccination rollout has been sluggish up to this point. As of the end of last week, just over 12 million COVID-19 vaccine doses have been administered in the United States, far short of the Trump administration’s goal of 20 million by the end of 2020. Biden’s proposal targets more Federal involvement to expand vaccinations, testing, and contact tracing—a sharp difference from the Trump administration’s preference to leave most decisions up to states. The success of these efforts will be critical for economic activity at a moment when the COVID-19 situation remains dire. Many countries continue to experience surging case counts, and new COVID-19 mutations are raising questions about vaccine immunity.
An effective vaccine rollout coupled with a significant fiscal stimulus package could encourage the beginnings of a new economic expansion. Indeed, inflation expectations have steadily climbed since the November election, with the ten-year breakeven inflation rate recently crossing 2% for the first time since 2018. And, new economic expansions have historically been great for risk assets. In fact, in looking at the last ten business cycles dating back to 1950, US equities have returned an average 13% annualized in the first three-year period of a new expansion, while US bonds have returned just 7% annualized.
We would expect this backdrop to be a tailwind for cyclically sensitive assets, such as small-cap and value equities. Both have been consistent laggards in recent years. But markets are forward-looking, and signs of rotation emerged in fourth quarter as investors focused on the potential for future stimulus and vaccine approvals, lifting small-cap and value stocks. These out of favor segments of equity markets are steeply discounted relative to broad equities and appear poised to benefit in a cyclical upswing.
Of course, there are risks to these views. Equity valuations are at or near all-time highs. The Federal Reserve could preemptively spook markets if they signal intent to raise rates too quickly to control inflation. And most importantly, the Biden administration will have little room for error as it inherits the critical challenges of distributing the vaccine to millions of Americans and contending with risks that new virus mutations could present. Despite these risks, we think the US political backdrop will be supportive of risk assets in 2021.