On Wednesday, January 20, 2021, Joe Biden becomes the 46th President of the United States. The financial press is awash in predictions as to how the stock market will perform under a Biden presidency. Implied in these predictions is a belief that who occupies the Oval Office will impact the stock market. The record of this is more one of coincidence than causality.
Going back a hundred years, to 1920, the political affiliation of every president of that decade was Republican. Given the booming nature of the times, it became a logical inference that Republicans were the party of business. This inference was solidified by the election of Herbert Hoover in 1928. Hoover was considered the apropos of pro-business and small government. However, a stock market bubble had been inflating, which popped in September of 1929. Hoover had nothing to do with the stock market crash. However, he was blamed for the tepid response by the government to the fallout it created. Because of this, a Democrat, Franklin Roosevelt, was elected in 1932. Hoover, the Republican, saw the Dow Jones averages shrink during his term from 313.86 to 53.84, a decline of 83 percent. Roosevelt, who was branded a socialist and worse by several papers of the day, was supposed to bury capitalism with his economic programs. Instead, during his first term, the stock market took off, going from 53.84 to 185.96 on the Dow averages, more than tripling in value.
All this begs the question: are economic cycles impervious to the political leadership in that they will do their thing regardless of who is President? It certainly seems that way.
Part of a president’s effectiveness depends on his relationship with the legislature. Here the assessment is still mixed. Even with a majority, legislative success depends on the party’s ability to maintain discipline and get representatives to vote the party line. This ability seems to come and go, especially in the Senate. Most Senators see themselves as better able to perform the role of the President if given a chance. Other aspects of the economic cycle are more prominent in the direction of the stock market. Technological innovation, government decrees, the direction of inflation, and interest rates are all factors in comprising the stock market’s performance over four years. Demographic changes and the willingness of governments, consumers, and businesses to assume debt, and current historical stock market valuations are all items that over-ride the selection of the President or the party. While the President can address some of these issues and other crises that come up, such as coronavirus, some of these trends are outside of the government’s ability to control no matter who is President. Total credit outstanding declined throughout the 1930s because there was no demand for credit and borrowing aside from the Federal Government. People were fearful that assets would not retain their value relative to the debt assumed and only paid cash whenever possible. Many matters can only be addressed by the President, given their ability to affect the entire country, and are thus not effectively addressed by states. The Federal debt is one such issue, especially since states cannot issue their own currency. National inoculation against the coronavirus is another. National defense is a third.
Social media has come in for government scrutiny. The internet, with a goal of keeping viewers online as long as possible for the edification of their advertisers, use their search engines and algorithms to deliver reinforcing views rather than balanced information. Internet sources should be bound by the same standards as print publications in terms of liability for the accuracy of their content. As it stands, social media has (until January 6) taken a very light touch in terms of editorial vetting of what was distributed on their platforms by their members. For people who have not been versed in critical thinking, the internet can seem to be an electronic version of a newspaper or magazine. While such sites exist, others use their editorial control to inflame passions and reinforce biases. This is how ISIS uses the internet for recruiting. Interestingly, many of the more inflammatory sites are domiciled in the Philippines. An area that does not get the attention it deserves is demographics. Population growth has stalled in the US with the current restrictive immigration policies. A realistic policy on immigration, one that serves the economic interest of the country, is desperately needed. When it comes to immigration, not all arguments are economic. Still, economic issues are a place to begin.
Almost everyone wishes a new administration well at the start. When specifics come out, conflict ensues. We should, as a country, be able to discuss differences in a manner that is respectful, specific, and free of negative implications of the opponent’s character or patriotism. Doing such will be no small feat. Achieving such will help to ensure the future of the country as we know it. Acceptable social behavior is set at the top and carried out by the sane, the law-abiding, and the mature.
The economy is still being supported by Federal assistance on a massive scale. Layoffs have continued to accelerate, mainly in the service sector. On the other hand, manufacturing is booming, as people, locked down at home, decide to spend their money on goods instead of services. The government passed a $900 billion package to address the issue. It is still being distributed at this time.
Semiconductor chips have assumed the role once played by steel in manufacturing. As products become more electronic, chips assume a critical role in their assembly. Ford Motor is shutting down its assembly plants in Germany for a month due to a shortage of chips for their various auto systems. This will mean good times for the chip industry until the market is oversupplied, then chip prices will crash, as has happened in the past. Many chip sources in China have been blacklisted by the US Government. This makes the sourcing of chips by US companies especially challenging.
Interest rates have been climbing for a month. While the gain to date is not material in terms of size, it has repercussions in terms of the cost of debt to companies, as well as future estimates for the same. The combination of a falling dollar and almost a trillion dollars in the new supply of debt to pay for the abovementioned Federal assistance is all acting to push the yields on US Treasury securities higher. With a $1.9 trillion assistance package on the table, it would seem the trajectory of interest rates will be up.
Inflation is increasingly occupying center stage. The combination of the lower dollar and the delayed effects of the tariffs put on by imports in prior years is making prices of a range of goods increase. The chip shortage is affecting appliances and almost all manufactured goods. With restrictive immigration and an aging population, it will take the economy little time to reach full labor capacity, after which we will see inflation in wages.
A central tenant of the Biden administration is “Buy American.” This is more difficult to do when parts to assemble American goods come from all over the world. It will be interesting to see how this plan is implemented. Bringing manufacturing to this country will not necessarily bring back jobs. A decade ago, it took ten man-hours to make a ton of steel. Now it only takes one.
The Stock Market
Since the election, the market has witnessed a rotation from growth to value stocks. This is due to the more compelling valuation of value, as well as the rise in interest rates, which tends to adversely affect higher-priced stocks relative to earnings more than lower-priced ones.
With the economy still shedding jobs, it would appear that it will be at least the second quarter if not the second half before earnings are again ascendant. While some commentators are talking of a new “Roaring Twenties” stock market compared to a decade ago, it seems that the high level of some stock values at present may result in some issues be relegated to the sidelines.
Warren M. Barnett, CFA
January 19, 2021