Inauguration day starts the clock on the first 100 days of a new administration, a symbolic benchmark period to measure early success. During the first 100 days, we anticipate another fiscal package, a pivot on foreign policy, trade and regulation, and a preview of future recovery spending.
Immediately, a flurry of executive orders will promote President Biden’s domestic and economic priorities, such as rejoining the Paris climate accord and extending moratoriums on evictions and student loan payments. A sweeping proposal on immigration reform will also signal a commitment to addressing those complexities, although this could be difficult for Congress to agree upon. While these items will build policy momentum, few will have as direct and swift an economic impact as his proposed 1.9 trillion USD fiscal package.
President Biden’s wish list for the fiscal stimulus package includes aid for state and local governments, larger and extended unemployment benefits, further household stimulus checks, and funding for the vaccine rollout and testing. Although the eventual package will likely carry a smaller price tag, more fiscal stimulus should lead to a faster and stronger recovery in both growth and earnings. That should benefit cyclical stocks, like financials, industrials and materials, plus small caps. However, improving growth and employment could push the Fed to taper asset purchases sooner, resulting in further yield curve steepening. While this should also benefit cyclical sectors in equities, it would hurt long-duration fixed income.
Beyond this, President Biden will also set the tone for foreign policy, trade and regulation. The administration will likely have a tough, but more predictable approach to China, and cooperate with foreign allies. This could lead to further dollar weakening, which should benefit international equities. From a regulatory standpoint, antitrust legislation on technology is a bipartisan issue, but probably a slow-moving one, representing a long-term headwind for technology stocks. Still, growth stocks will be important to portfolios once lower trend-like growth resumes post-pandemic. However, within energy, re-regulation could be swifter. Although this is a headwind for energy returns, structural challenges of excessive oil supply and lower oil prices are already a constraint.
After the first 100 days, the administration is likely to propose a recovery package geared towards infrastructure spending and clean energy, perhaps with modest tax reform included. However, a slim Democratic majority, a large share of moderate Democrats, and political polarization, may limit the scope of change. With the politics of 2020 behind us, policy will come to the fore in 2021, charting the course for the economic recovery and future growth.
Lewis, Jeffrey B., Keith Poole, Howard Rosenthal, Adam Boche, Aaron Rudkin, and Luke Sonnet (2021).
Voteview: Congressional Roll-Call Votes Database. https://voteview.com/
With U.S. federal debt currently at 100.1% of GDP, the highest since World War II and rising, investors often wonder what the breaking point could be of mounting U.S. debt. The critical consideration to examine is not actually the level of debt or the ratio of debt to GDP, but rather the cost of servicing the debt. The chart below shows national debt soaring (gray), but the interest rate paid on that debt coming down sharply in recent decades (light blue).
This has made debt more affordable. The chart on the right shows the net interest payments on federal debt as a share of nominal GDP. Despite the surge in government debt to combat the effects of the pandemic, the cost to service this debt is much cheaper than it was in, for example, the mid 90’s to early 00’s when debt to GDP was below 50% and the government operated with a budget surplus. This is owed to the fact that interest rates are structurally lower, reducing the cost of debt. Using September CBO forecasts, interest payments would appear to be manageable throughout the next decade, but the forecast also suggests rates would remain low. This is likely in the near term, but eventually rates will rise.
If rates were to rise and the average interest rate paid were to rise to 3%, rather than the average of 1.3% forecast under current conditions, the net interest payments as a share of GDP would rise to 3.2%. This is significant because net interest payments as a share of GDP peaked in 1991 at 3.2%, which forced President George H.W. Bush to renege on his promise of no new taxes. While this may not be the absolute breaking point, it could be deemed as a point of fiscal stress by historical standards.
National debt may be sustainable in the short run, but at some point, rates will rise and deficits and debt will have to be tackled through spending cuts or tax increases.
Source: Congressional Budget Office, J.P. Morgan Asset Management. Forecasts based on CBO data as of September 2020.
Data are as of January 11, 2021.
Did You Know:
– The lowest (3.5%) and the highest (14.7%) unemployment rates in the United States in the last 50 years (since 1970) both occurred in 2020, and they took place just 2 months apart (source: Department of Labor).
– At the beginning of 2020, the all-time record low average interest rate nationwide for a 30-year fixed rate mortgage was 3.31% set on 11/22/12. A new record low average rate was established during 16 separate weeks in 2020, the last taking place on 12/24/20 at 2.66% (source: Freddie Mac).
“Conformity is the jailer of freedom and the enemy of growth.” – John F Kennedy
“Coming together is a beginning. Keeping together is progress. Working together is success.” – Henry Ford