What the new US president means for your money

Joe Biden is almost certain to be the next president of the United States. Donald Trump may fight for every inch, but unless there’s a huge surprise, then, come January, Biden will be sworn in. How much does that matter for investors?

Despite all the fuss that gets made about it, the occupant of the White House matters far less than lots of other factors. But there’s no doubt that a Biden presidency will be better for certain sectors, and worse for others, than a Trump win. So what should you be taking into account?

The state of the nation

The first question is how the land will lie once the dust has settled. It looks as though the Senate will stay in the hands of the Republicans. So Biden probably won’t be able to spend as much as he’d hoped on a “green new deal”. However, it suggests that we won’t see huge changes to taxation either. As John Higgins of Capital Economics notes, even if the Democrats do manage to take the Senate with “the slimmest of majorities, their more moderate senators would probably limit Biden to a more centrist legislative agenda”. So while less may be given with one hand, less will be taken away with the other. 

Of course, there are variations within that basic template. Whatever your views on him, Trump was undoubtedly a divisive leader, even within his own party. Some Republicans might be keen to distance themselves from him, and thus more willing to cooperate on certain issues – particularly as Biden has a reputation for bipartisanship, having worked closely with Mitch McConnell, the Republican Senate majority leader, in the past. In that case we might get more spending than expected. Alternatively, perhaps the Republicans may decide that continuing down the “Trumpism” route (albeit perhaps without Trump) is the key to winning in 2024, in which case they may be more obstructive than expected. If that happens, the Federal Reserve – America's central bank – will feel the need to step in and do more of the heavy lifting to prop up the US economy.

Fed boss Jerome Powell has already warned US politicians not to tighten the purse strings. In a pre-election speech, Powell urged the government to keep supporting businesses and unemployed workers through the pandemic. “Fiscal policy can do what we can’t, which is to replace lost incomes for people who are out of work through no fault of their own.” That said, Powell and the Fed are by no means powerless even if gridlock does prevent any further stimulus packages from being passed in the short term. 

The Fed can still do yield curve control (pinning long-term bond yields to a specific low target – perhaps zero, as the Bank of Japan is already doing); it can still decide to buy lower-quality assets with quantitative easing – eg, copying the Bank of Japan again, in buying equity exchange-traded funds (ETFs); or turn interest rates negative (just like – you guessed it – the Bank of Japan). And even if Biden chooses to replace Powell, then his most likely pick for Fed governor will be someone even more inclined to money-printing, such as Lael Brainard, who is currently seen as his top pick for Treasury secretary. 

So the only real question is how much fresh money comes in via the fiscal route, direct from the government (in which case it’s likely to be more inflationary), and how much comes in via the central bank route (which means it’s more likely to boost asset prices but not necessarily inflation). That said, some extra spending seems all but certain – we won’t see a return to fiscal conservatism any time soon.   

What can Biden do?

Assuming that the balance of power implies gridlock, what difference can Biden make? The obvious area is in foreign policy, where the president has the most freedom to act alone. At the top of the list is China. As Tom Mitchell notes in the Financial Times, despite a sense that Trump’s legacy is one of trade wars, the trade representatives of the US and China have in fact managed to “turn trade into what is now arguably the most stable plank in [an] otherwise extremely fraught relationship”. Indeed, adds Mitchell, the China Daily newspaper noted after Biden’s victory that trade is “one of the last threads linking the two sides”. So Biden may simply continue as before – monitoring the results of the “phase one” trade deal which saw China agree to buy more commodities from the US, with a view to progressing to “phase two” next year. 

That said, don’t expect relations to improve. For all that Biden is viewed as less volatile than Trump, that doesn’t necessarily mean less tension. Biden will revert to the more multilateral approach used in the past: gathering allies in Europe, North America and Asia to take a joint view under a weaker form of “Pax Americana”. The US will remain wary of China’s expansionism, particularly its growing belligerence towards Taiwan. A return to the “big umbrella” approach may leave China feeling more ganged up on by Western nations than under Trump’s more individualistic approach. As Biden himself put it: “When we join together with our fellow democracies, our strength more than doubles. China can’t afford to ignore more than half the global economy.”

But as Edward Luce notes in the FT, China may also provide Biden with the ideal way to sell investment in big infrastructure projects to his Republican rivals. Luce cites Thomas Wright of the Brookings Institution think tank: “They could find common ground with Republicans on industrial policy, infrastructure and many other areas if they place competition with China at the heart of their agenda.” And a more predictable approach to trade relations may help improve investor sentiment towards emerging markets more generally. 

What might all of this mean for your money?

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