The markets and the Biden administration

Updated September 28 | Market news

Since President Joe Biden was inaugurated in January 2021, his administration has been focused on implementing policies and programs that represent a shift in direction from the previous administration.

Some changes have occurred and more are in the works. What is the potential impact on the markets? Investment leaders from U.S. Bank have reviewed policy positions from the Biden administration. Here, they offer an assessment of how the markets have fared so far under the Biden administration and what to expect going forward.

A change in direction

2021 marked a major year of change in Washington, with Democrat Joe Biden in the White House and slim Democratic majorities in control of the House and Senate. Given the narrowness of the partisan advantage in Congress, “it’s not a foregone conclusion that major changes will occur even with Democrats controlling both houses,” says Tom Hainlin, national investment strategist at U.S. Bank. “The parties themselves are not uniformly in lockstep with each other, so that may limit the extent of new legislative initiatives.”

Early in the new administration, Congress narrowly managed to pass President Biden’s $1.9 trillion COVID relief package. It included direct payments of up to $1,400 to most Americans, an extension of enhanced unemployment benefits, one year of direct payments to families with children and additional financial support for hard-hit businesses.

Beyond this initial legislative victory, the Biden administration has been focused on the following issues:

  • Vaccine rollout – this was a top priority, and more than 60 percent of the U.S. population age 12+ was fully vaccinated by September. More challenging will be convincing those Americans who have not yet been vaccinated to do so to help curtail the spread of COVID-19 in this country. In September, the president outlined a plan to mandate vaccines for significant numbers of Americans. Expanding worldwide distribution of vaccines is another challenge.
  • Infrastructure investment – a $1.2 trillion infrastructure plan passed the Senate and awaits House action. This could include a wide range of projects, including repairs of roads and bridges and green energy programs.
  • Targeted aid for families – this includes spending and tax credits designed to boost opportunities for higher education, more affordable childcare and expanded subsidies for health insurance coverage. The actual amount is up in the air, but a $3.5 trillion package was initially proposed.
  • Tax law changes – Congress is now considering a range of proposals from the Biden administration and members of the House and Senate that would alter tax policy, with a particular impact on higher income Americans and corporations. Get details on the proposed tax law changes.
  • Expanded healthcare access – President Biden is proposing an expansion of premium subsidies for those who obtain health coverage through the Affordable Care Act. Also on the table is a proposal to allow Americans age 60 and older to enroll in Medicare.

Interest rates and the economy

The Federal Reserve (the Fed) demonstrated its commitment to help keep the economy on track as the pandemic proved persistent. This includes adhering to a so-called zero interest rate policy for the foreseeable future. The Fed’s “easy money” stance has clearly been a plus for the investment markets. “Low interest rates and a policy of buying Treasury and mortgage bonds have been a big support for investors,” says Rob Haworth, senior investment strategy director at U.S. Bank. “The Fed’s actions have likely helped to limit any significant downside movement in the stock and bond markets.”

Notably, officials indicated in late September that the Fed might start “tapering” its purchases of Treasury and mortgage-backed securities by the end of the year. The entire practice of buying debt in the public markets may be fully curtailed by mid-year 2022. In addition, some members of the Federal Open Market Committee have indicated that the Fed may begin moving short-term interest rates higher by the end of 2022, sooner than previously expected.

Another boost to the markets was the economy’s strong start to the year. After achieving annualized Gross Domestic Product (GDP) growth of 6.3 percent in the 1st quarter of 2021, 2nd quarter growth followed at a 6.6 percent rate, based on the second estimate of growth from the U.S. Bureau of Economic Analysis. There are signs that the upsurge in COVID-19 activity due to the Delta variant may have slowed economic activity since then.

Even with strong first-half growth and rising concerns about inflation, the Fed has remained steadfast in maintaining its stimulative measures. “Up to now, we’ve had a situation where fiscal and monetary stimulus was in place even as the economy gained steam,” says Eric Freedman, chief investment officer at U.S. Bank. “We continue to closely watch to see if these factors will trigger an inflationary reaction, which could create some challenges for the markets.”

The market’s response

The early months of the Biden administration saw the U.S. stock market maintain the momentum it carried since beginning to rally after the COVID-19-triggered setback in early 2020. Through the first eight months of 2021, the S&P 500 gained 21.6 percent. Small-and mid-cap stocks have lagged a bit but still performed well. The S&P 400 MidCap Index is up 20.3 percent through August while Russell 2000 Index of small stock performance has returned 15.8 percent.

It’s important to note that a number of factors contribute to market performance, and it’s not strictly a reflection of the individuals who wield positions of power in Washington. “What’s mostly driven stock prices higher in 2021,” says Haworth, “is the actual rise in corporate earnings.” He says stocks are only modestly on the expensive side based on underlying corporate results.

Bond markets faced some pressure early in the year, as signs of a stronger economy fueled fears of a potential uptick in inflation. Yields on the benchmark 10-year U.S. Treasury note, which began the year at under 1 percent, rose to a high of 1.74 percent by the end of March. Note that bond values decline as interest rates rise. Yields have moderated since that point.

Positioning portfolios for the second half of 2021 and beyond

When it comes to the flurry of policy initiatives that typically come with a new administration, it’s important to keep a big-picture perspective.

Freedman notes that economic volatility from public policies tends to be contained within specific industries rather than affecting the general economy. “With political issues, it’s typically not a broad market set of considerations,” he says. “It tends to be more sector-focused.” Here are specific themes that U.S. Bank investment leaders will be paying close attention to in the coming months, but are also believed to offer attractive, long-term potential:

  • Secular growth sectors. According to Freedman, these are industries well positioned to benefit from long-term trends in the economy. Included in this are sectors focused on helping people be more productive, such as information technology and e-commerce. In the early part of 2021, information technology was a lagging performer, but it’s anticipated to be a beneficiary of a strong economy. Healthcare is another area that’s seen as an effective, long-term opportunity. Freedman notes “longer life expectancies are a reality for most; people are taking better care of themselves and looking for ways to remain more active.” This generally entails a bigger investment in maintaining health.
  • Cyclical stocks. Materials and Financial stocks ended 2020 on a strong note and continued that trend in the early months of 2021. These stocks appear to be well positioned to benefit from the economic upturn that dates to late summer of 2020.
  • U.S stocks in general. Equities in general appear to be in a more favorable position compared to fixed income investments, and U.S. equities have outpaced international stocks so far in 2021. That trend is expected to continue at least in the near term.

Most important to the markets is how the economy performs going forward. It’s fair to anticipate some market uncertainty and volatility over the remainder of 2021 and into the early months of 2022. This is particularly due to uncertainty around what happens next with COVID-19. Yet Hainlin points out that increased volatility has become more woven into the investing landscape — and that it might not necessarily spell bad news, especially when the economy is otherwise sound.

Regardless of how events play out, we think maintaining a properly diversified portfolio that is attuned to your specific comfort level with investment risk is a sound strategy.


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Diversification and asset allocation do not guarantee returns or protect against losses. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Stocks of mid-capitalization companies can be expected to be slightly less volatile than those of small-capitalization companies, but still involve substantial risk and may be subject to more abrupt or erratic movements than large-capitalization companies. Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks of larger companies and may be expected to do so in the future. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is generally free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.