There have been no fanfare or fireworks. The markets have coldly welcomed the announcement of the stimulus plan of the president-elect of the USA, Joe Biden, by which plans to inject 1.9 trillion dollars into the economy to alleviate the effects of the pandemic. Analysts and investors are now looking beyond the first details of this announcement before issuing their verdict, hence the calm in stocks and bonds on Friday, that if they have done something, it has been to correct slightly when a fact that was fully discounted was made public. Known the amount and the main items, the question that now hangs over investors is know how it will be financed and, above all, if despite dominating in the Senate, the brand new Democratic administration will be able to carry it out.
“The market has had the classic reaction to any major announcement: spike before the anticipated news and drop when the facts are released,” says Russ Mold, chief investment officer at AJ Bell. Predictably, the plan allocates some 400,000 million (330,000 million euros) for the creation of a national vaccination program, about 350,000 million dollars (290,000 million euros) for local and state governments, while the rest of the money will go directly to the pockets of US citizens affected by the crisis. Are expected payments of up to 1,400 dollars (1,150 euros) and other aid in terms of housing, or child nutrition programs, for families with few resources, as well as for small and medium-sized companies affected by the drop in income.
“The proposed support measures add fuel to the fire that taxes and interest rates will have to go up”Adds Mold, two factors that have negative connotations for equities, which casts a cloud over the ability of stock markets to keep up with 2021.“ However, the Federal Reserve has struggled to underline that will not increase rates in the near future, so it is feasible that I can continue the party in the bags for a while yet ”.
“Biden could theoretically undo many of Trump’s tax cuts for businesses and the wealthy from day one in the Oval Office, but tax hikes are unlikely to be the top priority for Democrats right now,” he says. his part Stephen Innes, analyst at Axi. So it points out that tax reforms will wait a year, at least until 2022.
In fact, there is nothing in Biden’s plan that appears to be funded by tax increases, so another is looming. bond issuance torrent“says Jeffrey Halley, an analyst at Oanda. These stimuli will add to the almost 4 trillion dollars that the administration of President Donald Trump has already spent during the pandemic,” all financed by debt, “continues.” The Republican administration it had a deficit of a trillion dollars even before Covid-19, so the deficit is not just a problem of the Democrats, “he rounds out.
But neither has a reaction been seen in fixed income. “The debt market had already reacted to the political change in the first week of January, so Thursday’s announcement caused neither heat nor cold,” Julius Baer experts point out. “We stick to our long-term vision that Treasury yields will continue to advance towards 1.5% in the remainder of the year and we maintain our call for the moderation of credit risks in the short and medium term ”, these experts warn.
IS THE BIDEN PLAN FULLY VIABLE?
While there may be something in the behavior of the major stock indices on Friday to ‘buy with the rumor and sell with the news’, Link Securities analysts believe that “the issue is more complex.” The program that Biden wants to be supported by both parties includes many of the aid that the Democrats had been proposing in recent months, but on some issues it goes beyond what is strictly related to the pandemic, such as the minimum wage, which proposes to increase nationwide to $ 15 an hour. “The problem is that some points of the program they will need the support of 60 senators in order to become law ”, these analysts point out.
Democrats control, after the Senate elections in Georgia, only 50 of these seats, with the vote in addition to the Speaker of the House, Vice President Kamala Harris, so they must have at least the support of 10 Republican senators. “Due to the content of some of the proposals,” these accounts “are far from being insured since, if the plan goes ahead, it would lead to a sharp increase in debt,” they continue. “It is for this reason, perhaps, that investors have not shown the expected euphoria”, they round out, since the process in the Upper House is not at all clear and can be condemned to an “endless hell of postponements,” Halley adds.
So that’s the challenge that the president-elect faces after taking office next week. “Given the contempt that Republicans have for state aid, the Biden’s hopes of bipartisan consensus will be put to the test immediately”, Believes the Oanda expert. “There is no clarity right now on how inclined Republicans will feel to this gesture,” he says. Not to mention that, in a future phase, new bills will reach the Senate to rebuild America that will almost certainly lead to tax increases.