President-elect Biden will officially take office on January 20th. With both congress and presidency under the control of the Democrats, the COVID relief measures and economic policies are expected to change significantly. It will be interesting to explore the implications of the potential changes on stocks markets.
COVID Relief Measures
Biden plans to pass another stimulus package including checks to individuals, funding for every American to receive the COVID vaccines, more funding for testing, a moratorium on evictions, direct funding for businesses, and state and local financial aid. He wants to vaccinate 100 million Americans by the end of his first 100 days in office. The additional stimulus and wide-spread vaccination will help the economy to recover and provide another boost to the stock markets. Especially, the stocks of travel, leisure and entertainment industries are likely to outperform as more and more people get vaccinated. The degree of success will depend on the success rate of the vaccines and how widely vaccinated the general world population will be.
Part of Biden’s tax plan is to create a more progressive tax code and raise taxes on the rich and corporations. The highest individual income tax rate could rise from 37% to 39.6%, and the corporate income tax rate would move higher from 21% to 28%. A minimum 15% tax on book income of large companies (at least $100 million net income per year) would also be imposed, and tax on profits from foreign subsidiaries of US firms would be at 21%. Higher taxes may slow economic growth, reduce corporate profits, and thus have negative impacts on stock market performance. With Democrats winning Georgia, some of these plans may be passed and become laws. However, the Democrats are not a unified bloc that always agrees on everything, and corporate lobbying may slow down or weaken the implementation of these plans. High employment rate and the ongoing COVID pandemic may also postpone the potential tax hikes to 2022 or 2023.
Federal Minimum Wage
Biden plans to raise the federal minimum wage to $15 per hour, and to give workers more bargaining power by banning non-compete clauses, limiting employers’ ability to classify low-wage workers as managers to avoid paying them overtime, and removing rules from workers’ contracts banning workplace discussion of wages. Obviously, it is likely that higher wages will reduce corporate profits, and thus stock values.
Biden indicates that he will uphold international trade rules that protect workers and the environment and encourage fair competition and innovation. But he may seek a more cooperative approach instead of starting new trade wars. Overall, his policies would be more consistent and predictable. The effect on the stock market may be favorable. Investors would be less nervous, as trade policies become less volatile. However, Biden inherits the US trade tariffs from the Trump presidency. It remains to be seen how the Biden Administration will deal with those tariffs and protect American jobs.
Biden’s healthcare plan is to strengthen the Affordable Care Act by offering public options and increasing healthcare coverage. He does not support Medicare-for-all or the elimination of private insurance. The plan is likely to benefit the pharma industry as more coverage means more paying customers.
Biden plans to create environmental sustainability in the economy and to set the US economy on a path to net-zero carbon emissions by 2050 with $2 trillion investments. His plan has many components such as updating decaying infrastructure, providing each American city with 100,000 or more residents with high-quality, zero-emissions public transportation, upgrading 4 million buildings, and reducing the cost of clean energy. Green energy and clean tech companies like Tesla are likely to benefit tremendously from those policies.