- Major challenges await the next presidentÂ
- Busy U.S. calendar today
Major challenges await the next president — The markets today will react to the outcome of yesterday’s election. The markets remain on guard for a disputed election and legal challenges, as well as the possibility of civil unrest and violence.
Regardless of whether Biden or Trump won yesterday’s election, the next president will have plenty of challenges to confront in January, the most important being the pandemic. There is also the key issue for President Trump and Congress of a spending bill in the lame-duck session to keep the U.S. government open past December 11.
If it turns out that Democrats swept Washington in Tuesday’s election, then the markets will not be overly worried about whether there will be a pandemic relief bill in the lame-duck Congress. The markets will then be expecting a huge stimulus bill in early 2021 that includes pandemic relief, as well as infrastructure and clean energy spending.
However, if President Trump won Tuesday’s election or if the Republicans kept control of the Senate, then there will be divided government for at least the next two years (until the 2022 Congressional election), and the markets will be worried about the prospects for continued gridlock and little stimulus spending.
Senate Majority Leader McConnell said last week that he does not expect to take up a pandemic stimulus bill until the next session of Congress in January. That indicated that he plans to block any stimulus bill pushed by Speaker Pelosi during the lame-duck session.
If the Republicans retain control of the Senate, then Mr. McConnell is not likely to move much above $1 trillion for a stimulus bill in early 2021. Speaker Pelosi, in that case, would have no real leverage to continue demanding $2.4 trillion and would be forced to compromise with McConnell, regardless of who is president in January. The consequence of Republicans keeping control of the Senate would likely be a stimulus bill of $1.0-1.5 trillion in early 2021, which is less than the markets have been hoping for.
No matter who won Tuesday’s election, Congress and President Trump will have to approve a spending bill by December 11 when the continuing resolution expires, or there will be another government shutdown. The most likely outcome is another short-term continuing resolution that punts a new spending bill into early 2021.
Depending on who wins control of Washington, the debt ceiling could become a major issue in 2021. The current debt ceiling suspension expires on August 1, 2021. The Treasury will be able to use its emergency measures for a few months, but the Treasury will run out of borrowing authority by autumn 2021. If there is no debt ceiling resolution by autumn 2021, then the threat will emerge again of a U.S. sovereign debt default.
U.S.-Chinese relations will also be a major issue for the next president. If President Trump won yesterday’s election, then he is likely to push for a Phase Two trade agreement. It is possible that Mr. Trump might cancel the Phase One trade agreement due to the failure of China to fully meet its promises to buy U.S. goods. In that case, Mr. Trump might launch a new round of tariffs on Chinese imports to use as leverage for a Phase Two trade deal.
If Mr. Biden won yesterday’s election, then he will face the same basic problems with China. However, Mr. Biden would likely rely less on tariffs on dealing with China and more on multi-lateral pressure. Regarding the existing penalty tariffs, Mr. Biden might work towards a large U.S.-Chinese deal that addresses all of U.S.-Chinese economic problems and includes an agreement by both sides to drop all the penalty tariffs imposed in the past several years. Alternatively, Mr. Biden could work towards a smaller deal involving both sides just dropping their penalty tariffs on each other.
The markets will also heavily focus on the tax outlook in coming months. If divided government continues in 2021, then taxes are not likely to change. However, if Democrats sweep Washington, then there will be some tax hikes in 2021 or 2022. Democrats might wait until 2022 to implement any tax hikes when the pandemic may be over and the economy is hopefully back on its feet.
Mr. Biden has promised not to raise taxes of people making less than $400,000, but he has said he wants to raise marginal tax rates on the wealthy, raise the capital gains tax for the wealthy, and raise the minimum corporate tax rate to 28% from 21%.
Busy U.S. calendar today — Aside from absorbing the results of yesterday’s election, the markets today face a busy economic calendar. The FOMC at its 2-day meeting that begins today is expected to leave its policy unchanged as it waits for more information on the prospects for fiscal stimulus after yesterday’s election. The markets suspect the FOMC will wait until December to make any shifts in its guidance since the FOMC at that meeting will release a new set of macroeconomic forecasts and a new set of Fed-dot forecasts for the funds rate.
The consensus is for today’s Oct ADP employment report to show an increase of +650,000, down from Sep’s increase of +749,000. Today’s Sep U.S. trade deficit is expected to narrow moderately to -$63.9 billion from Aug’s -$67.1 billion but remain wide due mainly to weakness in exports. Today’s Oct ISM services index is expected to show a small -0.3 point decline to 57.5, giving back part of Sep’s rise of +0.9 points to 57.8 but remaining in strong territory that indicates service-sector executives remain relatively optimistic about the outlook despite the pandemic surge.
