Y.This evening, President Biden addressed a joint congressional session for the first time in his presidency and on the eve of his hundredth day in office. Despite the historic backdrop of two women behind Biden, an eerily empty chamber, and the two hundred participants wearing masks, the event seemed familiar to me. It still sparked the kind of political drama we expected: Democrats got training by standing at the end of seemingly every sentence to applaud enthusiastically, while Republicans mostly sat in silence, trying to convey contempt through sedentary body language, didn’t by the easiest to do.
Aside from the minor partisanship, what did the speech actually mean for America and especially for investors?
The cynic in me tends to answer “nothing” to this question, but that is not necessarily 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 because Reagan is too simplistic and not always true. Sometimes, the president said, government action is not only necessary but desirable if we are to improve our lives.
To that end, we heard an ambitious list of social programs, including universal pre-K education and free community college for all Americans, along with health and other reforms paid for through tax hikes for the rich. There have been many calls for unity in Congress and for bipartisanship, but in the modern political world, many of the priorities set by the president have absolutely no chance of garnering Republican support.
Because of this, most of the television coverage of yesterday’s speech featured multiple pans for one man: West Virginia Senator Joe Manchin. If any of this is to become law it will require a unified democratic caucus in both the House and Senate, so support from right-wing democrats like Manchin will be essential. That gives them a lot of power, but it also makes it likely that what actually comes out of it as legislation will be much more moderate than speech.
Even Biden himself seemed to recognize this reality and praised the Republicans who had found a contradiction to his infrastructure proposal with an admonition to get to work. This implies a willingness to compromise on what is likely to have the greatest impact on the economy and the market. Adding $ 1.8 trillion to the monetary and fiscal incentives already in place would benefit the market, almost regardless of where that money was spent. The crisis would of course come in terms of how it was paid for.
Contrary to what we instinctively think and Republican orthodoxy, there is no real evidence that a change in income tax rates will affect the economy that much over time. Indeed after a study The non-partisan Tax Policy Center has shown that “over long periods of time, growth rates in the United States have not changed in parallel with massive changes in the structure and return on income of the tax system.”
However, this is not the case when it comes to the short-term impact of tax increases, especially corporate tax, on the market. An increase in this rate will have a direct and noticeable effect on the company’s results. You can argue that if these revenues are wisely spent by the government or used to pay off the already massive national debt, it will have an overall positive effect, which will at least make up for it, but history up to this point suggests that none of these things are the case is particularly likely.
Despite the practical problems of getting any of the things outlined and the likely limited impact of what turns out to be the final version, there were some indications for investors from last night’s speech regarding sectors and industries. For example, healthcare stocks lagged this morning as the president spoke to patients in general about the issue of drug prices and costs. That sector’s underperformance is likely to continue, too, as tackling high prescription drug prices and incomprehensible bankrupt medical bills is a rare area of bipartisan agreement. Unfortunately, these things also seem to be an integral part of the business models of some companies in the industry. As long as they stay at the top, the entire industry will have trouble.
On the other side of the coin, energy levels are outperforming this morning and oil is also higher. This isn’t entirely due to Biden’s words, but the lack of specific policy proposals that would immediately put oil and gas companies at a disadvantage will have been a relief for many investors there.
Ultimately, this speech will have far less impact on the market than in the short or medium term the Fed Claims yesterday that they will continue to keep rates low and add liquidity even if they say they expect faster growth and higher inflation. It is likely that it will be that and more great revenue from Apple (AAPL) and Caterpillar (CAT) in place of Biden’s words from last night, among other things, causing stocks to trade higher this morning and that is an encouraging sign for the future.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
