25th January 2021
Sigh of relief
As Joe Biden was inaugurated as the 46th president of the United States last Wednesday, a collective sigh of relief, at the return of civility, decency and a genuine interest in the wellbeing of all citizens, could be felt around the world. Perhaps not one of the great inaugural speeches of US history, and one delivered by a man with qualities best described as moderate temperament and unifying empathy rather than ambitious dynamism. Yet Biden brought himself out of retirement to face arguably the most challenging set of circumstances ever presented to an incoming president. A raging pandemic and its economic consequences, a flailing US democracy, systemic racism, America’s fallen standing in the world and the “cry of survival from the planet itself”. Only time will tell whether Biden can rise to this challenge and echo contributions made by those past holders of the office also labelled ‘moderate in character’, such as George Washington, Abraham Lincoln and FD Roosevelt.
Are earnings keeping up with expectations?
Despite the upheaval of the past year, in investment terms we have started 2021 in much the same position we were 12 months ago – before the pandemic. The extraordinary support provided by central banks has kept the global financial system awash with liquidity. US stock markets are trading at all-time highs, while major equity indices all over the world have rallied to their highest levels in months. Inevitably, corporate earnings underlying equity prices have not kept pace. Market moves have been driven not by current economic reality, but by economic expectations – the promise that strong growth is just around the corner. In the meantime, equity earnings yields are still much better than central bank-suppressed bond yields. This somewhat rational share price exuberance is giving some investors valuation vertigo, believing that markets have become too expensive and fearing that – sooner or later – reality will have to set in.
The Biden reflation
Officials within the Biden administration have stated that the new US government “will take action – not just to reverse the gravest damages of the Trump administration – but also to start moving our country forward”. Few things on the agenda promise to move the US forward more than Biden’s fiscal plans.
The White House has already lined up a $1.9 trillion COVID relief package – only a month after Congress agreed $900 billion to support the virus-ravaged economy. The plans have already faced a backlash from fiscally conservative Republicans (who only seem to care about the deficit when in opposition), but with Biden’s Democratic Party now controlling both Houses of Congress, there is only so much Republicans can do to dilute the measures. The total size of the package could be pushed as low as $1 trillion, but even at that level it would mean a fiscal boost of 8.5% of GDP.