On Nov. 11, Tolen Teigen, the Chief Investment Officer of FinDec, along with Michael Townsend, Vice President of Legislative and Regulatory Affairs of Charles Schwab, and host of a podcast called WashingtonWise Investor, sat down for a Zoom discussion a week after Election Day and just a few days after multiple sources called the presidential election for Joe Biden. With a mixed result for both sides of the aisle — and the balance of power in the U.S. Senate awaiting the outcome of two key Jan. 5 runoffs in the state of Georgia — it is safe to say there are still uncertainties about where things will stand politically speaking in 2021.
Townsend spends much of his time in the Beltway as part of a small team from Charles Schwab closely following legislative and regulatory affairs. Teigen shared a number of questions with Townsend, ranging from healthcare to investing and stimulus.
Bear Icebox Communications has the pleasure of working alongside FinDec and we were able to sit in on this conversation along with a number of FinDec’s clients. Here are some of our key takeaways.
Control of the Senate is up for grabs and all eyes are on Georgia
Not a lot of people were anticipating the scenario that played out this election season, according to Townsend. Yes, Joe Biden is the President-elect…but, Republicans had a much better than expected showing in the House — Republicans actually gained several seats while Democrats were projected to add potentially 10 to 15 seats to their existing majority — while they are on a path to potentially maintain control of the Senate.
In short, this election may have been good for Biden, but not great for the Democratic Party.
It all comes down to one state, where two elections will anticipate the balance of power in the Senate for the next two years. All eyes are on Georgia and two runoffs for the U.S. Senate. It’s extremely unusual to have two runoffs for two seats in the same state during the same election season: Georgia is only one of a handful of states where there is an automatic runoff if no candidate receives a majority of the votes on Election Day. Both parties will likely pour hundreds of millions of dollars into these Georgia campaigns over the next six weeks to try and gain the Senate. For the wonkier folks out there, you can read all about it on FiveThirtyEight.com.
As it stands, Republicans will have 50 seats in the Senate and Democrats will have 48. If the Democrats are able to win both Senate runoffs in Georgia, they would have 50 in the chamber, equal to Republicans. However, Vice President-elect Kamala Harris would serve as the tie-breaker as President of the Senate. So, if Democrats are able to take both seats, they would technically have control (albeit by the narrowest possible margin).
Even in that case, Townsend noted that it will likely be very difficult for Democrats to pass any sweeping legislation over the next few years given the split in the Senate.
Economic stimulus — will we ever get another round of it?
There’s a lot of interest in whether or not this will get done during a lame duck Congress. Over the past few weeks, Treasury Secretary Steven Mnuchin and Speaker of the House Nancy Pelosi had been inching closer to a $2 trillion package. However, Senate Majority Leader Mitch McConnell has not been interested in a sweeping package, particularly before the election.
Now, McConnell is talking about a package, albeit about half the size of that. Townsend told us bluntly that he is “skeptical that something will happen before the end of the year.”
Having said that, a surprising surge in the stock market the Monday after Election Day may point to the fact that the market is anticipating some kind of stimulus deal — and Townsend says the market should be right in anticipating that.
And about that stimulus — will there be any surprises in the next bill?
It’s possible there may be some interesting points in the stimulus bill, according to Townsend. There’s been a lot of talk about money for restaurants or concert venues that could potentially be added in, particularly with indoor dining bans sweeping parts of the country amid this second wave of the pandemic. But it’s going to be difficult to figure out what will be in the final package until McConnell and Pelosi come to the negotiating table. And the Georgia runoff may complicate things further.
The push and pull between Republicans and Democrats will likely continue, but both sides may be more willing to roll their sleeves up and come to terms now that the election is over. Time will tell.
The skinny on PPP forgiveness
Townsend is anticipating that officials may relax some of the rules around forgiveness for the Paycheck Protection Plan. The Small Business Administration (SBA) already eased some of the guidelines for businesses who received $50,000 or less in funds. Those businesses can essentially self-certify that they used the money appropriately and receive forgiveness.
President-elect Biden’s focus
With inauguration day a little over two months away and — after a week of uncertainty and vote counting — Joe Biden is slated to be certified as the next president by a majority of state electors.
So, the question is, what will a Biden administration focus on when the time comes to take over?
Townsend went through a handful of key priorities he sees:
● If a new economic stimulus package hasn’t been passed, that has to be the first item out of the gate. Probably a pretty robust economic stimulus package too — again, this will depend on who has the majority in the Senate.
● Joe Biden didn’t waste any time announcing members of his Coronavirus Task Force — as with the Trump administration, the pandemic will likely take center stage, at least early on in Biden’s presidency.
● Infrastructure will also likely be at the top of Biden’s list. This is typically a bipartisan issue — in fact, Donald Trump’s team had been weighing a $1 trillion infrastructure proposal to further boost the economy this summer. Infrastructure could include strengthening broadband, improving roads and other projects to add jobs and stimulate the economy.
● Townsend noted that some of Biden’s more ambitious environmental plans, including sweeping green legislation, will have a hard time getting through with the makeup of Congress. Simply put, a Green New Deal will not get done with a Republican-led Senate and faces major obstacles even with a 50-50 Senate. And ideas like a carbon tax will need to be “scaled back” according to Townsend to be a salient issue.
● He noted that alternative energy will probably be a winner in the Biden administration, depending on where Democrats and Republicans can find common ground.
Taxes under a Biden presidency
A lot of investors noted that under a Biden presidency and a Blue sweep (meaning that Democrats handedly won a strong majority in the House and flipped the Senate), we could have seen potentially steep increases in some taxes including corporate tax, top individual tax rate, and potential change to dividends for people making a million or more.
Townsend said those are simply off the table in a divided Senate.
Also, worth noting: Townsend said that these taxes were always going to be part of other Democrat-backed initiatives. It’s going to be difficult to include some of these tax increases in a narrowly divided Washington — so, some of those fears of major tax hikes have gone away.
There may be a few smaller items that could get through, but even changes to the Estate Tax are fairly low, Townsend noted.
For tax planning purposes, any changes in 2021 would likely not kick in until 2022 — it is highly unusual for a tax change to be retroactive to the beginning of the year.
The bottom line: People and businesses following tax changes have time: There is a low likelihood that anything will happen that impacts the 2021 tax year.
Looking at the Treasury Department, the Fed and Debt
The Treasury Secretary will likely play a crucial role as the economy continues to recover from the pandemic. Townsend noted that a frontrunner is Lael Brainard, a Fed official who worked underneath Presidents Clinton and Obama. She’s largely viewed as a moderate pick. Given that the Senate must approve of Candidate positions, it is highly unlikely that someone like Elizabeth Warren, who some within the Democratic Party have pushed for, would be selected.
Fed Chair Jerome Powell will be in his position through the end of 2021 and the Biden administration is unlikely to have any immediate effect on the central bank’s interest-rate policy.
In terms of where Powell’s head is at — he has been incredibly explicit, according to Townsend: We need more stimulus.
Which leads us to the federal debt and our deficit. Quick side note: Anyone who either likes these numbers (or, is looking to stress themselves out), check out https://www.usdebtclock.org/).
In any event, the U.S. national debt is now at $27.2 trillion. This year’s budget deficit alone is $3.1 trillion (thanks in large part to a historic stimulus bill from earlier this year).
Should Americans worry about this? In the short term, no. Right now, interest rates are low. And, according to Powell and the Fed, we need to focus on the immediate needs of the American people. This may even not be a middle-term issue. However, in the long run, it is something we will need to deal with.
China policy under Biden
Townsend predicts a multilateral approach from Biden, working with allies on China trade policy. He doesn’t see Biden cutting off all tariffs at once. In fact, while it seems like a long time ago, phase one of the China trade deal just went into effect earlier this year (yes, it has been a long year).
Simply put, Townsend doesn’t see a stark change in direction when it comes to trade policy with China early on in a Biden administration.
Big Tech under Biden
While there have been questions raised by Republicans about how Big Tech, particularly social media companies, handled the election, there are other questions about leading tech companies and the influence they have.
From an investor perspective, Townsend doesn’t see consensus in terms of whether Big Tech companies may be broken up via antitrust laws. In fact, the last prominent antitrust case in the communications industry was in the 1980s with the United States v. AT&T.
How about health care?
One of the winners in government gridlock is the healthcare sector according to Townsend. There has been a lot of interest in the Supreme Court case about the Affordable Care Act. It looks like it is unlikely that the court will throw out the Act, meaning that we will likely be in the same place we’ve been.
One area of consensus among Republicans and Democrats Townsend sees is on drug prices. He thinks we could see movement on a bipartisan level to control drug prices.
Last, but certainly not least…retirement and the impact of the election on it
Townsend noted a positive development in the SECURE 2.0 Act, bipartisan legislation that aims to help more Americans successfully save for retirement. It builds on the SECURE Act passed last year.
There is a lot in SECURE 2.0, but it looks to incentivize companies, make enrollment automatic easier when new plans are introduced, allow more catch up contributions for people 60 and older and allow individuals to save for retirement longer by increasing the required minimum distribution from 72 to 75.
How much does the president impact my retirement savings?
Townsend left everyone on a reassuring note. He said that if you had invested $10,000 in 1900 and took out your money when just one party was in control, you would be far short of being a millionaire. However, if you just kept that money in the market, you would have $4.2 million today.
Moral of the story? Stay invested. Dramatic changes to a plan or portfolio should be done when your life changes, not when outside forces change.