Joe Biden takes on a raft of seemingly intractable problems when he takes office this week, but the buoyant US stock market hasn’t been one of them. Could it become another problem for the incoming president?
- Joe Biden inherits a poorly controlled pandemic; a divided country; a weakened economy and vast debt
- The US stock market has been exceptionally strong, but now faces a raft of problems, including problems in its largest companies, a weakening Dollar and waning productivity
- The stimulus package may not address some of the US’s key problems
Joe Biden takes office as the 46th President of the United States this week. He inherits an unenviable situation: a poorly controlled pandemic; a divided country; a weakened economy and vast debt. He must also shore up the US’s position on the world stage as the country’s international power is waning.
However, to date, he hasn’t had to worry too much about the stock market. The S&P 500 continues to defy gravity, buoyed by the $1.9 trillion stimulus package planned for his early days in office. However, there are risks mounting for the US stock market.
None of these risks are new; they have just become far worse over the past 12 months. The US market is excessively concentrated in a handful of very expensive technology stocks, some of which have seen their ratings double during 2020. This leaves the market vulnerable to any change of market mood and particularly, any rotation into cyclical companies.
It also leaves it vulnerable to any regulation of the giant technology companies. Anti-trust cases are mounting against Google and Facebook and European regulators are also looking at ways to clip their wings. Any reversal in the ratings for these companies will drag US markets lower, particularly if combined with a rise in corporate taxes that the Democrats’ Senate win makes more likely.
Then there is the problem of the Dollar. The US government is reliant on investors being willing to buy the $10trn in Treasury issuance expected this year. Yet foreign investor demand for US treasuries is waning given low yields and a deteriorating fiscal situation. This looks bad for the Dollar – and for investors in Dollar assets.
There are even concerns over the nature of the rescue package. Yes, it puts money in people’s pockets and should provide a boost in short-term discretionary spending. However, it will not improve the US’s weakening productivity numbers in the same way as investment in, say, infrastructure or education. Biden has plans to boost spending on infrastructure and green energy, but these are more politically fragile and may not get through Congress.
Investors have been calling a turn in the US stock market for some time and it has proved endlessly resilient. However, it’s difficult to build a compelling case for US equities today and Joe Biden may need to add ‘flagging stock market’ to his list of woes.
