The markets and the Biden administration

Market news

Since inauguration in January 2021, the Biden administration has been focused on implementing policies and programs that represent a shift in direction from the previous administration.

What changes have occurred and what more can be expected? Will the new policy direction have a bearing on the markets? Investment leaders from U.S. Bank have reviewed policy positions laid out by the new leadership. Here, they offer an assessment of how the markets have fared so far under the Biden administration and what to expect going forward.

A change in direction

The election of Joe Biden as President marks a change in control of the administration from Republicans to Democrats. Just as important, however, is the makeup of Congress. Given the narrowness of the partisan advantage in Congress, “it’s not a foregone conclusion that major changes will occur even with Democrats controlling both houses,” says Tom Hainlin, national investment strategist at U.S. Bank. “The parties themselves are not uniformly in lockstep with each other, so that may limit the extent of new legislative initiatives.”

Early in the new administration, Congress narrowly managed to pass President Biden’s $1.9 trillion COVID relief package. It included direct payments of up to $1,400 to most Americans, an extension of enhanced unemployment benefits, one year of direct payments to families with children and additional financial support for hard-hit businesses.

Beyond this initial legislative victory, the Biden administration spent the early part of 2021 focused on the following issues:

  • Vaccine rollout – this was a top priority, and over half of the adult population of the U.S. was fully vaccinated by May. More challenging will be meeting a target of 70 to 80 percent of Americans being fully vaccinated as a key strategy to dramatically curtail the spread of COVID-19 in this country, as well as helping to distribute vaccines worldwide.
  • Infrastructure investment – it’s possible that an infrastructure-spending plan of between $1 and $2 trillion will be pursued in the coming months. This could include a wide range of projects, including repairs of roads and bridges and green energy programs.
  • Targeted aid for families – this includes spending and tax credits designed to boost opportunities for higher education, more affordable childcare and expanded subsidies for health insurance coverage.
  • Tax law changes – Congress is now considering a range of proposals from the Biden administration and members of the House and Senate that would alter tax policy, with a particular impact on higher income Americans. Get details on the proposed tax law changes.
  • Expanded healthcare access – President Biden is proposing the addition of a “public option” for health insurance purchased through the Affordable Care Act and allowing Americans age 60 and older to enroll in Medicare.

Interest rates and the economy

The Federal Reserve (the Fed) has demonstrated its commitment to help keep the economy on track through this pandemic period. This includes adhering to a so-called zero interest rate policy for the foreseeable future. The Fed’s “easy money” stance has clearly been a plus for the investment markets. “Low interest rates and a policy of buying Treasury, municipal and corporate bonds are a big support for investors,” says Rob Haworth, senior investment strategy director at U.S. Bank. “The Fed’s actions are likely to help limit any significant downside movement in the stock and bond markets.”

The economy is showing renewed strength. After achieving annualized Gross Domestic Product (GDP) growth of 4.3 percent in the 4th quarter of 2020, GDP climbed at an annualized rate of 6.4 percent in the 1st quarter of 2021, based on an initial estimate from the U.S. Bureau of Economic Analysis. This is an indication of an approaching “steady state” for the economy as it recovers from the impact of the COVID-19 pandemic.

Even with such strong growth and rising concerns about inflation, the Fed has remained steadfast in maintaining its stimulative measures. “As the year progresses, we may have a situation where fiscal and monetary stimulus remains in place while the economy is gaining steam, assuming widespread vaccine distribution is effective,” says Eric Freedman, chief investment officer at U.S. Bank. “We continue to closely watch to see if these factors will trigger an inflationary reaction, which could create some challenges for the markets.”

The market’s response

It’s important to note that a number of factors contribute to market performance, and it’s not strictly a reflection of the individuals who wield positions of power in Washington.

The early months of the Biden administration saw the U.S. stock market maintain the momentum it carried since beginning to rally after the COVID-19-triggered setback in early 2020. Through the first five months of 2021, the S&P 500 gained 12.6 percent. Small-and mid-cap stocks have performed even better. The S&P 400 MidCap Index is up 18.8 percent through May while Russell 2000 Index of small stock performance has returned 15.3 percent.

Bond markets faced more pressure, particularly early in the year, as signs of a stronger economy fueled fears of a potential uptick in inflation. Yields on the benchmark 10-year U.S. Treasury note, which began the year at under 1 percent, rose to a high of 1.74 percent by the end of March. Note that bond values decline as interest rates rise. Yields have moderated since that point.

Positioning portfolios for the second half of 2021 and beyond

When it comes to the flurry of policy initiatives that typically come with a new administration, it’s important to keep a big-picture perspective.

Freedman notes that economic volatility from public policies tends to be contained within specific industries rather than affecting the general economy. “With political issues, it’s typically not a broad market set of considerations,” he says. “It tends to be more sector-focused.” Here are specific themes that U.S. Bank investment leaders will be paying close attention to in the coming months, but are also believed to offer attractive, long-term potential:

  • Secular growth sectors. According to Freedman, these are industries well positioned to benefit from long-term trends in the economy. Included in this are sectors focused on helping people be more productive, such as information technology and e-commerce. In the early part of 2021, information technology was a lagging performer, but it’s anticipated to be a beneficiary of a strong economy. Healthcare is another area that’s seen as an effective, long-term opportunity. Freedman notes “longer life expectancies are a reality for most; people are taking better care of themselves and looking for ways to remain more active.” This generally entails a bigger investment in maintaining health.
  • Cyclical stocks. Materials and Financial stocks ended 2020 on a strong note and continued that trend in the early months of 2021. These stocks appear to be well positioned to benefit from the economic upturn that dates to late summer of 2020.
  • Mid- and small-cap stocks. As anticipated, mid-cap and small-cap stocks have also benefited from the economic recovery. This is in contrast to the environment for much of 2020, where a select group of large-cap stocks dominated the market. “As a sense of normalcy returns to the economy, investors typically are willing to take on more risk, and that’s reflected in the performance of mid-and small-cap stocks,” says Haworth.

Most important to the markets is how the economy performs going forward. It’s fair to anticipate some market uncertainty and volatility over the remainder of 2021. Hainlin points out that increased volatility has become more woven into the investing landscape — and that it might not necessarily spell bad news, especially when the economy is otherwise sound.

Regardless of how events play out, we think maintaining a properly diversified portfolio that is attuned to your specific comfort level with investment risk is a sound strategy.


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Diversification and asset allocation do not guarantee returns or protect against losses. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Stocks of mid-capitalization companies can be expected to be slightly less volatile than those of small-capitalization companies, but still involve substantial risk and may be subject to more abrupt or erratic movements than large-capitalization companies. Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks of larger companies and may be expected to do so in the future. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is generally free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.