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A new administration—and what it might mean for investors

How key industries could be affected by the change of leadership in Washington

Paintbrushes on a canvas

AS A NEW ADMINISTRATION takes the reins of government and begins to put its priorities into motion, markets have thus far reflected optimism that the economy will continue its path to full recovery. Among the positive economic signs, emergency approval and distribution of two potentially effective coronavirus vaccines in the U.S. have raised hopes of an end to the pandemic, at a time when cases are spiking in many parts of the country. And a new $900 billion round of stimulus, passed at the end of 2020,1 buoyed hopes for continued economic recovery.

“The economy could be in full recovery by early 2021,” believes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “That’s well over a year ahead of what the most bearish forecasts were during mid-2020.”  He points to “unprecedented stimulus, a soft U.S. dollar and positive trends in economic and earnings growth as key factors that we believe will continue to support an equity uptrend in 2021.”

“The economy could be in full recovery by early 2021. That’s well over a year ahead of what the most bearish forecasts were during mid-2020.”

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

Yet risks and challenges abound as the nation prepares for a new political era. In Georgia’s January 5 runoff, Democrats won control of the Senate—just barely, with a 50/50 split and Vice President Kamala Harris’s vote the potential tie breaker—and they retain a slim majority in the House, reinforcing the need for bipartisan agreement to get things done in Washington. Political volatility remains one of the major risks to the economy and markets, Hyzy notes. Here’s what could happen in some key areas as the new administration takes over the reins of government.

Health care

President Biden’s first health-care priority will be attempting to stem further spread of the coronavirus—a priority the markets should favor. To that end, Biden has announced a 13-member task force of doctors and other health experts to combat the disease. Even as health care workers and others receive the first waves of vaccinations, distribution challenges remain a serious risk for markets as well as health care, Hyzy says.

In other health-care areas, Biden is likely to push for expansions of the Affordable Care Act and increased Medicaid enrollment, according to Andrew Bressler, Research Analyst, BofA Global Research.2 With such tight margins in the Senate and House, there’s less likelihood of broader changes that could impact health-care companies, such as a public option for health insurance.

Energy and the environment

The incoming Biden administration has already announced that the United States will rejoin the international Paris climate change agreement and has plans to establish a target of net-zero carbon emissions by 2050, says Ehiwario Efeyini, Director and Senior Market Strategy Analyst, Chief Investment Office for Merrill and Bank of America Private Bank. These and other steps could boost demand for solar, wind and other renewable energy sources while hastening a transition away from traditional fossil fuels.

“One of the key risks for 2021 was that fiscal austerity might put the brakes on economic growth. That risk now appears to be greatly reduced.”

Jared Woodard, Head of BofA Global Research’s Research Investment Committee

Infrastructure spending

Biden and Congress will likely support a new wave of infrastructure spending, including both traditional projects such as new schools, as well as new projects, such as expanding broadband internet access. “The future of mobility hinges on next-generation infrastructure,” Hyzy says. A greater emphasis on new infrastructure could benefit companies devoted to areas such as “smart cities” technology, autonomous vehicles and drones.

Government stimulus

Trillions of dollars in fiscal stimulus from the U.S. government helped businesses and families endure historic economic challenges throughout 2020. One challenge for the new government is agreeing on further fiscal relief for 2021. Democrats have signaled their aim to build on the $900 billion December relief package, calling it merely “a down payment”3 on what’s needed to support economic recovery and help families in financial need. “One of the key risks for 2021 was that fiscal austerity might put the brakes on economic growth,” says Jared Woodard, Head of BofA Global Research’s Research Investment Committee. “That risk now appears to be greatly reduced.” An additional $1 trillion in spending, could add at least 1% in GDP growth, driving projected growth from 4.6% to nearly 6% for 2021, Woodard adds.4

The other side of stimulus pertains to the Federal Reserve’s monetary policies. The Fed has signaled its plans to continue near-zero interest rates policies aimed at helping stimulate the economy, Hyzy says. This should help businesses obtain the liquidity they need to plan for long-term growth, he adds.

What investors can consider doing

The period immediately following an election or other major event is a good time for a conversation with your advisor, Hyzy believes. Investors who had wondered how a blue sweep might affect their taxes, estate plans or investments in industries such as health care or energy may want to discuss how the picture changes.

Still, it’s important to avoid sudden decisions based on the outcome and to consider your portfolio in the context of the broader economy and your personal goals, he adds. “Housing, for example, could continue to be an engine of growth,” Hyzy says. The technology sector has surged amid an upswing in remote working, digital health care, e-entertainment and online buying. And corporate earnings in 2020 have outpaced expectations. These factors, combined with the likelihood of ongoing low interest rates, currently favor stocks over bonds, Hyzy says.

Stocks of large U.S. companies have offered an attractive combination of high quality, growth potential and yields from dividends, he adds. In the year ahead, investors may also find opportunities with stocks of smaller companies, which have offered higher cyclical growth potential and more attractive prices, Hyzy notes. With China’s economic activity approaching pre-pandemic levels and the dollar weakening, the outlook for stocks of emerging-market countries has improved, Hyzy believes, and with low interest rates in place, bonds should remain an important tool for diversifying a portfolio.

Despite expected growth in 2021, the ride won’t always be smooth, economically or politically, Hyzy adds. In the days ahead, review your portfolio regularly with your advisor and rebalance as needed, especially following periods of volatility.

Tune in to the CIO Market Update Audiocast Series for ongoing insights on what to expect from the markets and the economy as the new administration begins to take shape in Washington.

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