A lot has happened over the past week. We have gone through a significant election cycle within the past seven days, and we have received essential news regarding the Pfizer COVID vaccine.
These two developments have rocked the global marketplace. But what are the implications of these two critical outcomes? As we near the end of 2020 (thank goodness), will Biden raise taxes and begin to undo President Trump’s deregulations? When will American’s begin to receive a COVID vaccine, and when can our economy open fully?
We attempt to dive into each of these questions.
The Economy & Market Under Biden
President-elect Joe Biden and Vice President-elect Kamala Harris have a very ambitious economic recovery plan, Build Back Better. This plan projects to spend over $7.3T by investing in clean-energy infrastructure, health care, housing, education, and economic fairness.
Biden and Team also intend to implement a new tax plan, including raising the corporate income tax rate, raising taxes on individuals that make more than $400K, increasing capital gains, and ratcheting up payroll taxes. Note that the Tax Foundation has projected a 1.62% GDP reduction over the longterm if Biden can pass his tax plan.
However, Joe Biden will take office with a divided Congress (the Democrats lead the House and the Republicans will likely lead the Senate). The consensus is that very little will get done over the next four years.
The biggest hangup is the near-term stimulus package many individuals and small business owners are vying for. Many pandemic aid programs are set to expire next month. With many businesses facing another round of lockdowns, this package cannot be passed soon enough.
According to Deutsche Bank, the most likely scenario is a $750B fiscal package finalized in early 2021. This is in sharp contrast to the $2.2T bill proposed by the Democrats in October and the $1.8T White House counter-proposal.
If Democrats don’t succeed in the January 5th Senate runoff for the two Georgia seats, the Republicans will maintain control, making it less likely that a major stimulus bill will be passed.
As a split Congress is the most likely scenario, it is also very likely that Biden’s tax plan and more regulation will not pass during his term. This bodes very well for the continued economic recovery and the stock market over the next four years.
COVID Vaccine
Quite possibly the most important press release by any drug manufacturer was published by Pfizer earlier this week.
“Vaccine candidate was found to be more than 90% effective in preventing COVID-19 in participants without evidence of prior SARS-CoV-2 infection in the first interim efficacy analysis.”
Source: Pfizer
I can’t stress how positive this is for all us. A 90% efficacy rate is better than any of us could’ve hoped for.
There is no question that a vaccine will help the global economy. However, the stay-at-home stocks that have performed very well this year have seen a sharp selloff (ZOOM, NFLX, PLTN, etc.) on the news while airline and cruise stocks have rallied.
Shift From Growth to Value
Furthermore, there is talk that a big cyclical shift from growth to value. As we all know, growth stocks have significantly outperformed value for the past 10 years.
There is also chatter that small-cap stocks will finally outperform large-cap companies. The thesis behind both is that economically sensitive companies will finally receive a bid now that an effective COVID vaccine will be available.
Furthermore, the FAANG-type growth tech stocks (Facebook, Amazon, Apple, Netflix, Google/Alphabet, etc.) face more regulatory risk now that Biden will be president. This headwind will be in addition to the significant rally these companies have already seen.
Value stocks have been beaten up recently, especially the energy and financial sectors. With an economic recovery currently underway, investors hope that higher oil prices and interest rates will provide a tailwind for both.
With higher interest rates (and subsequently higher discount rates), this theoretically makes growth companies less ‘valuable’ as their projected cashflows do not look as attractive as their value counterparts.
All of these ideas and projections are behind the recent shift to smaller value companies. However, this can also be a head fake, as we’ve seen before. I do not believe we will see significantly higher interest rates, which is a key component of this thesis. Furthermore, a lot of the faster-growing companies are not only stay-at-home companies. A majority of them are highly innovative companies pushing the boundaries within their respective industries. They will likely continue to take market share, even post-COVID.
All of this highlights the importance of not taking a large bet either way, and it is the fundamental reason why passive investing tends to win over the longterm.
We shall see, of course, how all of this plays out. The score may change, but the game never ends. If you have any questions, please do not hesitate to contact us. We are always happy to assist.
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