What President Biden's Big Speech Means for Investors
Yesterday evening, for the first time in his Presidency and on the eve of his one hundredth day in office, President Biden addressed a joint session of Congress. Even with the history-making backdrop of two women behind Biden as he spoke, an eerily empty chamber, and the two hundred attendees wearing masks, the event felt familiar. It still prompted the kind of political theater that we have come to expect: Democrats got a workout by standing at the end of seemingly every sentence to applaud enthusiastically, while Republicans mostly sat in silence and attempted to convey contempt through seated body language, not the easiest thing to do.
Petty partisanship aside, though, what did the speech actually mean for America and, more importantly here, for investors?
The cynic in me is inclined to answer that question with "nothing," but that isn’t strictly true. The speech was an attempt to change the narrative, to point out that the pandemic has shown us that the "government is always bad" view that has dominated American politics since Reagan is too simplistic and not always true. Sometimes, the President asserted, government action is not just necessary but can be desirable if we are to make our lives better.
To that end, what we heard was an ambitious list of social programs, including universal pre-K education and free community college for all Americans, alongside healthcare and other reforms, paid for by increases in taxes on the wealthy. There were a lot of appeals for unity in Congress and bipartisanship but in the modern political world, many of the priorities laid out by the President have absolutely no chance of garnering any Republican support.
That is why most TV coverage contained multiple pans to one man at yesterday’s speech: West Virginia Senator Joe Manchin. If any of this is to become law, it will take a united Democratic caucus in both the House and the Senate, so the support of right-wing Democrats like Manchin will be essential. That gives them a lot of power, but it also makes it likely that what actually emerges from this as legislation will be much more moderate than the speech sounded.
Even Biden himself seemed to recognize that reality, praising the Republicans who have come up with a counter to his infrastructure proposal with an exhortation to get to work. That implies a willingness to compromise on the thing that will probably have the biggest impact on the economy and the market. Adding $1.8 trillion to the monetary and fiscal stimulus that is already out there would, almost regardless of where that money was spent, benefit the market. The crunch, of course would come in terms of how it was paid for.
Contrary to what we might instinctively think and to Republican orthodoxy, there is no real evidence that changing income tax rates influences the economy that much over time. In fact, according to a study by the non-partisan Tax Policy Center showed that "growth rates over long periods of time in the United States have not changed in tandem with the massive changes in the structure and revenue yield of the tax system that have occurred."
That, however, isn’t the case when it comes to the short-term impact on the market from raising taxes, particularly corporate income tax. Raising that rate will have an immediate, tangible effect on companies’ bottom lines. You can argue that if that revenue is spent wisely by the government or used to pay down the already massive national debt, it will have a positive overall impact that will at least offset that, but history to this point suggests that neither of those things is particularly likely.
Despite the practical problems of getting any of the things outlined done and the probably limited impact of whatever emerges as the final version, there were some clues for investors from last night’s speech in terms of sectors and industries. Healthcare stocks are lagging this morning, for example, as the President talked about the issue of drug prices and costs to patients more generally. That sector underperformance will likely continue too, because tackling high prescription drug prices and incomprehensible, bankruptcy-inducing medical bills is a rare area of bipartisan agreement. Unfortunately, those things also seem to be an integral part of the business models of some companies in the sector, so as long as they stay at the forefront, the sector as a whole will struggle,
On the other side of the coin, energy stocks are outperforming this morning and oil is higher too. That is not entirely attributable to Biden’s words, but the lack of any specific policy proposals that would disadvantage oil and gas companies immediately will have come as a relief for many investors there.
When all is said and done, this speech will have far less short or medium-term impact on the market than the Fed's assertion yesterday that they will continue to keep rates low and inject liquidity, even as they say they see faster growth and higher inflation coming. It is likely that it is that, and more great earnings from Apple (AAPL) and Caterpillar (CAT) among others, rather than Biden’s words last night, that is causing stocks to trade higher this morning and that is an encouraging sign for the future.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.