What comes to mind when you think of Inauguration Day in the United States?
Red, white and blue flags draped over every surface. All the trappings of pomp and ceremony. Hopes and expectations as high as the Capitol platform on which the incoming president delivers his high-flying rhetoric.
Fast-forward a few months and such lofty aspirations tend to fall swiftly back to earth. The long old slog of day-to-day politics tends to take its toll. Exhibit A: Joe Biden.
Following his early success in passing $1.9 trillion of additional stimulus spending to get the country through the pandemic back in March, the path since has been much rockier.
The president’s room for manoeuvre is hamstrung by his Democratic Party’s narrow majority in the House of Representatives – and worse, by divisions among the Democratic contingent in the Senate, where the party balance is split exactly 50-50. As Joe Biden himself has memorably put it, in these circumstances “every single one” of the Democratic senators is effectively a president in their own right.
This backdrop has led to extreme difficulty in passing the next phases of the president’s economic plan, and negotiations have dragged on for months with as yet only limited success. It was good to see Congress finally agree $550bn of new spending on infrastructure in November, though this was hugely down from the president’s initial ask of $2.3 trillion.
Meanwhile, Biden’s broader Build Back Better proposal, which focuses on childcare, education and housing, remains mired in legislative limbo. Negotiations so far have already reduced the ambition of the plan by half – down from $3.5 trillion to $1.75 trillion – but even this sizeable concession has yet to fully persuade crucial Democratic senators on the party’s right wing.
Some have argued that the rancour and gridlock contributed to the Democrats’ narrow failure to retain the governorship of Virginia in a bellwether election held in early November. It is also worth keeping in mind that the favourite to be elected president in 2024 among many online bookmakers is now one Donald Trump! (The upside in this scenario? Markets certainly liked his programme of deregulation and tax cuts.)
So it looks likely that fiscal policy will not provide quite the boost to the economy that markets anticipated when Democrats first took control of government back in January.
The good news however is that the US economy seems to be motoring along just fine regardless. Among other developments:
- A closely-watched survey of the health of the services sector – the dominant portion of the economy – recently recorded the highest reading since its inception in 1997
- Consumer spending has rocketed not just back to where it was pre-Covid, but rather vastly ahead of the pre-crisis trend
- The number of initial claims for unemployment payments recently touched the lowest weekly level since 1969
These are each remarkable successes when one considers the depth of the hit that the economy suffered only last year.
Whether or not the emergence of the new Omicron variant of the novel Coronavirus disrupts this progress remains to be seen. At the time of writing, it remains unclear just how virulent the new strain is as well as how likely it is to escape the clutches of existing vaccines. Fingers crossed that the eventual news on these fronts is positive.
Assuming the worst
Still, let’s play devil’s advocate and assume the worst – that the new variant proves economically disruptive. Under those circumstances, the Federal Reserve would come under pressure to delay its tightening of policy, perhaps pausing the tapering of its quantitative easing programme and leaving rates lower for (even) longer.
That’s precisely the kind of tune that has been music to investors’ ears in recent years. Low rates are an especial tonic to the kind of high growth, ‘long duration’ stocks of which the US market is heavily composed.
Yet whatever happens on the Omicron front, the past 18 months or so have once again illustrated just how impressive the US economy is in its innovation, its vibrancy and its fundamental resilience. To count America out as a matter of long-run asset allocation would likely be an unwise move, even if the market does face near-term hurdles including elevated inflation, signs of speculative excess, demanding starting valuations and a divided and bitter body politic.
Let’s hope that by the time the next inauguration rolls around, a quieter backdrop in markets, politics and civil society allows the person taking the oath to keep those high hopes afloat for a little longer… even if that proves a grave disappointment to the 24-hour news channels!