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Grandpa Joe’s new dawn?

Market Update

Grandpa Joe’s new dawn?

Yesterday saw Joe Biden officially inaugurated as the 46th President of the United States. To mark the occasion, all the major US stock indices ended the session at record highs and continued to rally in early trade on Thursday. But what a time to take over the presidency, given the devastation that the coronavirus pandemic and the associated economic slump have caused. Could it be that Mr Biden is about to lead his country into a new dawn? And if so, how?

Dealing with the coronavirus

Over the weekend Joe Biden’s Chief of Staff Ron Klain sent a memo to White House advisers. In that note Mr Klain identified "four overlapping and compounding crises" to address: Covid-19, the economy, climate change and racial inequality. The first big issue on that list is the coronavirus pandemic which continues to run riot. There have been more than 24.3 million cases and over 400,000 deaths in the US so far, and it’s clear there will be significantly more. Despite the US’s position as the world’s richest economy, and one of the most developed, the country’s response to the pandemic has been patchy, generally poor, and highly politicised. The economic effects have been devastating and even the hopes brought by the development of effective vaccines have been tempered by their disappointing rollout. Consequently, it’s no surprise that Mr Biden was quick to announce his American Rescue Plan. The plan, with an estimated cost of $1.9 trillion, is designed to help US citizens while the country struggles to deal with the pandemic. It includes direct payments of $1,400 per month to eligible individuals; an increase in the Federal weekly unemployment benefit to $400 from $300, extended to the end of September, rather than March as it stands currently. Mr Biden’s bill also includes $350 billion for state and local government aid; $170 billion for schools and higher education; $50 billion toward Covid-19 testing and $20 billion towards a national vaccine programme. The president has also included a proposal to increase the federal minimum wage to $15 an hour.

Getting it through Congress

Although there were no big surprises in the plan, with the overall stimulus of $1.9 trillion coming in at the upper end of expectations, stock markets sold off soon after the announcement. The concern is that Mr Biden will struggle to get it approved by Congress. It’s true that the Democrats still have a modest majority in the House of Representatives. They also have the upper hand in the Senate where the seats split equally between the Democrats and Republicans. This is because Vice-President Kamala Harris has the deciding vote on a 50:50 split. Thanks to the filibuster threshold that requires 60 Senate votes for a bill to pass, legislation will need to be bipartisan. It will require the backing of 10 Republican votes and all Democrat senators, including the moderates, for the bill to pass. This will be a tall order.

Opposition on both sides

There is likely to be significant opposition to Mr Biden’s plan from Republicans and probably from some moderate Democrats as well. Many policymakers dislike the fact that so much of the proposed spending is untargeted, with many intended recipients in no need of the bailout funds. On top of that, many Republicans will vote against any plan that gives money to ‘profligate’ Democrat-controlled states and local governments. There’s also a compelling argument that the $15 per hour minimum wage will make it a lot harder for the low-skilled workers to get jobs. The Biden administration could get parts of the bill through under budget reconciliation provisions which only require a simple Senate majority. The trouble with this is that breaking up the plan will prove very messy. It will also make it difficult to establish Republican support for other measures going forward. Bear in mind that this bill is just the first salvo of fiscal stimulus. The Biden administration is also working on an economic plan targeting job creation, infrastructure spending, clean energy, health, and education.

Caution urged

As Joe Biden delivered his inauguration speech and as US stock indices hit fresh highs, there were investors urging caution. They warn that the damage the lockdown has inflicted on small and medium-sized businesses (the backbone of the US economy) can never be repaired and many of these businesses won’t be reopening.  As an example, towns and cities that rely on tourism are suffering. Hotels, restaurants, and all the businesses that serve them and their customers have been badly hit. The failure of these small and medium-sized firms has led to an exodus of residents from these newly run-down areas and this has resulted in housing vacancies and falling rents. Many observers believe that providing stimulus cheques, increased unemployment benefits and fighting for a higher minimum wage, while laudable, won’t provide new jobs. So, the rot will spread. Certainly, the latest jobs numbers are cause for concern. December’s Non-Farm Payroll reported the loss of 140,000 jobs, well below the expected increase of 65,000. Last week’s Jobless Claims soared to 965,000 the highest since August last year. Overall, the US lost more than 21.5 million jobs at the beginning of the pandemic. Since then, we’ve seen cumulative payroll gains of around 12.1 million, so there’s a shortfall of 9.4 million jobs since the economic effects of the pandemic hit in March and April last year.

In conclusion

President Biden has a Herculean task ahead of him. He must get his country open again for business with children back in school and with small and medium-sized firms confident enough to start hiring again. He’s certainly prepared to throw a lot of money at the problem. But two questions remain: is he throwing it in the right places, and who’s going to pay the bill?

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