This article was updated on Saturday, Nov. 7. Aron Szapiro also contributed to this report.
The Associated Press has declared that Joe Biden is the winner of the 2020 presidential race. At this time, it appears that the Republicans will likely hold on to the Senate.
There remains a slim chance the Democrats might also capture the Senate (pending the outcome two uncalled races as well as two Georgia runoffs), but it would only be a one-seat majority at best. Such a slim Democratic majority would likely struggle to coalesce around making sweeping changes.
As such, the key question for investors is what changes a Biden presidency/GOP Senate scenario could bring. Biden's platform proposed major new spending programs, including healthcare, clean/renewable energy, infrastructure, and education, among others. However, Biden's ability to institute most of these major policy changes is going to be very limited without Democratic Senate control. The Republican Senate majority will set the agenda, and so even if a handful of GOP senators are amenable to Biden's proposals, it will be an uphill battle for any major Democratic legislation to even see the Senate floor.
We think the experience of 2010-16 is instructive (when Barack Obama was president, but the Republicans held the House, and later the Senate as well): Congressional Republicans are likely to stay disciplined in denying Biden significant legislative victories.
A handful of Democratic policy priorities can be accomplished solely through executive action, and we expect a potential Biden administration to pursue these regulatory avenues. With that said, Biden's executive authority might end up limited compared with Obama's, thanks to potential new Supreme Court rulings around the power of the administrative state.
Below, we'll discuss the implications that policy changes could have on sectors, companies, and ultimately investors. We'll focus on the scenario of a Biden/GOP Senate victory. Although it may be prudent to consider making a few modest changes in your portfolio, we recommend focusing on your long-term investment goals.
Corporate Taxes Equities rallied after the election, likely reflecting the reversal of market fears that we'd see a large corporate tax hike if the Democrats achieved a clean sweep. We agree that such a tax hike would likely have occurred in that scenario, which could've caused a negative impact to aftertax earnings on U.S. equities in the high single digits. However, with Republicans looking likely to hold on to the Senate, we doubt we'll see a corporate tax hike. From that standpoint, the broad uptick in equities looks logical. Following the rally, we think stocks are generally fairly valued; however, we note this valuation is upwardly skewed by several mega-cap stocks that we think are overvalued. For long-term investors, we continue to see the most opportunity in small- and mid-cap stocks especially in the value category.
Fiscal Stimulus in Jeopardy in a Biden/GOP Senate Scenario With either a Donald Trump win or a Biden/Democratic Senate clean sweep, we had been very confident in the prospects for a massive stimulus bill being passed in 2021, perhaps around $1.5 trillion to $2.0 trillion (or 7% to 10% of U.S. gross domestic product). The details of the bill would have varied depending on which scenario occurred, but it would have included some mix of support for small businesses and those who remain unemployed. The Democrats would've also included heavy funding for state and local governments whose finances have been adversely affected by the coronavirus pandemic.
However, we doubt that the GOP Senate will allow another massive stimulus bill with the prospects of a Biden presidency, as Biden will essentially own the economic track record as of January 2021. We could see a smaller bill ($500 billion or less), but even that's not guaranteed.
Nevertheless, in our base-case economic outlook, we don't think the lack of further stimulus is a fatal threat to the recovery. We covered this recently in "We Still Expect a Strong U.S. Economic Recovery." In our view, COVID-19 vaccines remain a much more pertinent issue for the economy than further stimulus. And assuming that we'll see broad vaccination in the United States in the first half of 2021, as we project, the economy will be in good shape without further stimulus.
If we were to see greater stimulus, that would modestly accelerate the recovery in GDP without changing its long-term trajectory. Long-term Treasury yields will also move higher with greater stimulus; dimming hopes for a stimulus likely caused the decline in U.S. 10-year Treasury yields on Wednesday morning. Also, aid to state and local governments could cause credit spreads to tighten on lower-rated municipal bonds for those municipalities that receive funds. A large stimulus package may also propel the price of gold higher in the short term and could push out our midcycle price forecast for gold. However, we continue to forecast that gold prices will come back down to earth once demand starts to cool.
Gold-mining companies could see a short-term pop, but we think that the companies under our coverage such as Agnico Eagle Mines AEM, Barrick Gold GOLD, and Newmont NEM are overvalued, as most have Morningstar Ratings of only 1 or 2 stars.
Impact to Healthcare Stocks From Policy Changes Is Unlikely Major changes to the U.S. healthcare system look unlikely if Biden wins but the Republicans hold the Senate. We expect a Biden administration to pursue initiatives that expand the insured population in the U.S., but we doubt we'd see policy changes that meaningfully change our valuations in the healthcare industry. The Affordable Care Act could be partially expanded through executive actions in the Biden era. However, it's also possible the Supreme Court could strike down the ACA. For further detail, see "Which Healthcare Policy Scenarios Remain Possible."
A public option looks very unlikely given GOP Senate control, but in any case, the implications of a public option for healthcare stocks would probably be slight. The impact of a public option would be limited to the individual exchanges as opposed to employer-sponsored insurance, according to our analysis. We expect that any shifts from employer-based insurance would be limited to very small employers that are unable to negotiate the same price discounts with insurers as larger employers, based on our projected pricing of a public option. We think the market is undervaluing firms in the managed-care organization sector, though healthcare stocks rallied as fears of major policies eased.
One MCO that stands out to us as being undervalued is Anthem ANTM, which we rate with 4 stars. Anthem is one of the lowest-cost providers in the MCO industry and would be the best positioned to withstand pricing pressure if public-option pricing is lower than we estimate.
Changing Course on Climate The more sweeping changes for climate/energy policy outlined in Biden's platform would require legislation, and as such they look unlikely with GOP Senate control.
With that said, there are some actions that Biden can take with the executive branch. Biden will seek to halt permitting for drilling new wells on federal land, although this will exempt the bulk of U.S. oil production. Vehicle fuel efficiency standards would likely be increased. We covered the implications of these policies for energy stocks in "U.S. Oil and Gas Doesn't Need a Trump Win to Thrive." Altogether, the policies won't change our outlook for oil and natural gas prices, and so most energy companies won't see an impact. For exploration and production companies with significant acreage on federal land, the drilling ban could have a moderate impact on fair values (around 12% to 14%).
A Renewed Push on Renewable Electricity A prospective Biden administration doesn't change the ongoing trend: Renewable energy will continue to grow as a percentage of electricity production and will become the second-largest source of power generation in the U.S. by 2030, according to our forecasts. We foresee that growth of renewable power will increase 8% annually based on state-level renewable energy policies as the primary growth driver as opposed to federal regulation.
Biden's energy platform calls for the U.S. to reach net-zero emissions by 2050, but the majority of U.S. utilities have already made this pledge. The most obvious beneficiaries are those utilities that already own a significant amount of their own, or are supplied by, renewable energy assets. This includes NextEra Energy NEE, Xcel Energy XEL, and CMS Energy CMS. We note, however, that the market has not only already incorporated this trend into those companies' valuations, but we think the prices for those companies' stocks have risen too high and rate them at 1 or 2 stars.
Utilities that we think are undervalued and will benefit over the long term include 4-star Edison International EIX, NiSource NI, and Portland General Electric POR. One 3-star company that will benefit from this long-term trend is Duke Energy DUK.
Growing Cannabis A potential Biden administration now has the chance to turn the campaign pledge to decriminalize cannabis into policy. We think motivation for further easing the federal prohibition could follow.
Banks and other ancillary services have stayed away from servicing cannabis companies because of legal risk. These companies' stocks are currently limited to trading on the over-the-counter market and Canadian exchanges. Decriminalization could prompt U.S. markets to allow these stocks to trade on U.S. national exchanges. This change would allow cannabis companies greater access to the capital markets for growth.
Companies that could benefit from deregulation and see greater investor demand include Curaleaf CURLF and Green Thumb Industries GTBIF. Both stocks have rallied over the past few weeks and are trading near their 52-week highs. Yet, even at these levels, we see value for investors in both stocks. We rate Curaleaf with 4 stars as it is trading at only a 0.77 price/fair value. Green Thumb is rated 3 stars but does offer upside potential as its price/fair value is 0.90.