With Democrat Joe Biden seeming to be on the road to a victory in the Presidential vote and with Republicans remaining in charge of the Senate (unless Democrats can sweep two run-off votes in Georgia in January–unlikely, in my opinion) and with Democrats retaining control of the House of Representatives (albeit with a reduced majority) Wall Street has been pricing in at least two years of dividend and gridlocked government.
Wall Street has a favorable opinion of periods when Washington doesn’t do much of anything–especially as in this case when the much of something that Democrats had proposed before the election included rolling back at least part of the Trump December 2017 tax cuts, increasing the tax rate on capital gains, and instituting a minimum tax rate for corporations.
None of that, Wall Street concluded after the election, is now possible. A good part of this week’s big rally in stocks–the NASDAQ climbed 9% for the week–was predicated on this scenario.
And when it comes to tax increases like those being advanced by one Democrats, I think the Wall Street is almost certainly right. Republicans who control the Senate aren’t going to vote to undo one of the signature “achievements” of the Trump years. And there are always at least a few conservative and moderate Democrats who will vote against raising taxes to make any effort on tax policy very tough too advance.
Wall Street is a very conservative institution (or group of institutions) and it doesn’t like change. If for no other reasons than that the change might gore one of the traditional bulls the market is riding on and because change is hard into a spreadsheet. So Wall Street, as a whole, has been relieved this week because it looks like big Democratic policy measures such as the Green New Deal and a $15 national minimum wage are unlikely to advance in the two years of the next Congress.
Of course, the doesn’t mean that progressive Democrats couldn’t strip specific items out of those bigger policy initiatives and attach them to other pieces of legislation (or proposed them as separate bills) and win approval for important items on their larger agenda (especially since they no longer have to worry about a potentially veto from a Trump White House.) We’ll get an important test of how well/how poorly this kind of legislative effort might fare in the upcoming negotiation and votes to on funding the Federal government before the December 11 deadline. If Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi decide to do some horse trading that secures money for Republican projects in exchange for dollars for Democratic initiatives, then we’ll know that Congress isn’t quite as deadlocked as Wall Street assumed in this week’s rally. On the other hand, if all the Senate will agree to is a “clean bill” that extends funding at current budget levels for the rest of the 2021 fiscal year, then yes, the forecast is for legislative gridlock as predicted by Wall Street.
But as the Obama administration to a degree and to an even larger degree the Trump administration have demonstrated, the 21st Century Executive Branch has tremendous scope to move policy initiatives without a Congressional vote–and even in extreme cases without Congressional funding.
And this is, as far as I can tell, absent from Wall Street thinking this week.
It’s important to remember, for example, that almost all of the Trump administration’s immigration policy, its environmental policy, its workplace and labor policy, and its financial markets policy rests of executive orders and regulatory changes introduced by executive departments.
And in a Biden Administration, assuming that’s what we’re looking at, investors and traders should count not just on a roll back of many or those executive actions, but on a Democratic administration, frustrated by Republican control of the Senate, to look to advance its own agenda, wherever possible, by executive action.
One area that seems primed for this kind of approach are energy policy where Trump administration efforts to expand oil exploration and drilling on national lands would seem a first target and where proposals to hamstring the solar and wind market by making it harder to sell power from those sources to utilities and likely to get reversed. It’s hard to underestimate the effect that replacing oil and gas industry lobbyists with even neutral administrators at the Environmental Protection Agency will have on energy companies. I’d expect to see an effort to restore–at the least–Obama administration rules of auto industry gas mileage and on pollution from utilities. Here the biggest fight is likely to take place in the courts where, as I read it, the current Supreme Court has a decidedly anti-regulatory bias.
Another place where I’d look for the impact of executive actions is in labor markets. The Trump administration has been just about completely disinterested in enforcing any workplace health and safety regulations even in the midst of a pandemic that used meat-packing plants as virus incubators. I’d also expect to see major revisions to efforts to re-define the nature of a job that looked to throw millions of workers into the nebulous and relatively unprotected independent contractor category/
Or how about the battle in the financial industry over standards of fiduciary duty that offered protection to investors. And then, of course, there’s the likely revival of the Consumer Protection Agency, Senator Elizabeth Warren’s brainchild that the Trump administration did its best to send to the dust bin of irrelevance.
That’s just scratching the surface–and there is also what I’d call the special case of Big Tech antitrust action against Alphabet (Google), Amazon, Apple, and Facebook. I call these a “special category” because both Republicans and Democrats are interested in tackling these tech giants–on very different grounds. It should be interesting if a Biden administration pushes changes at the Justice Department that adds new energy to the anti-trust division there. (As well as to the civil rights division, just to name one part of Justice.)
My advice at this point is don’t rule out big changes for the economy–and specific sectors–just because we’re looking at legislative gridlock for the next two years (at least.)