What a ‘lame duck’ White House could do to markets

When the Democrats control the White House but the Republicans both chambers of Congress, the S&P 500 has had an annualised return of about 17 per cent. That’s between one (Republicans) and two (Democrats) percentage points higher than when one party has full control.

Where the markets have gone, the economy has usually followed. That’s probably because “gridlock” means that either there is policy paralysis or those policies that do get enacted tend to be only those that can garner bipartisan support. Markets and businesses like stable and predictable economic settings.

Apart from the unusually complex economic and geopolitical backdrop, however, never has the relationship between the Democrats and Republicans been so divided or poisonous nor the Republicans so captured by the extremes of the party.

If the Republicans take the House and the “MAGA” wing is swollen by the outcome of the elections an early order of business will be a congressional inquiry into Hunter Biden and a series of attempts to impeach Joe Biden.

Of greater concern for the markets – global markets – will be the fate of the US debt limit. There was a lot of brinkmanship last year before the legislative ceiling on US government debt was finally raised, avoiding a complete shutdown of the government and an unthinkable default on US government borrowings.

The debt ceiling is $US31.4 trillion ($48.4 trillion). The current level of US government debt is $US31.2 trillion, which puts it on track to hit the limit early next year.

The Republicans have been saying that they will demand big cuts to spending on social security and Medicare and other government spending as the price for supporting any increase in the ceiling.

That would be a non-negotiable for the Democrats, who are considering whether they can fast-track a vote during the “lame duck” period before the new Congress is in place on January 3 next year.

In 2011, when Barack Obama was presiding over a Republican-dominated Congress seeking similar deep cuts to spending, the US came within days of defaulting on its debts and the US lost its AAA credit rating from S&P Global as a consequence.

Whatever the outcome of the tussle over the limit this time, it is apparent that there will be no new spending of any magnitude if the Republicans do get control of congress – Biden’s expansive agenda will be truncated, as might the administration’s support for Ukraine – and there will be a concerted effort by the Republicans to ensure that the rest of Biden’s term is very much a lame duck period.

Apart from blocking any new Biden appointments the Republicans have signalled that they want to roll back some of the regulatory creep that has occurred under Biden, with the Securities and Exchange Commission, the Federal Trade Commission, the Consumer Financial Protection Bureau and environmental protections in their sights.

While the big end of US business might welcome deregulation, there is an “anti-woke” stream to the Republicans’ attitude towards business, particularly on environmental issues, that has seen them in conflict with companies ranging from Disney and Coke to BlackRock.

BlackRock’s Larry Fink, an aggressive promoter of climate change and social and governance-influenced voting by shareholders, might find himself hauled before congressional committees to defend his position, as might some of America’s largest banks for reporting on, and limiting, their lending to carbon-intensive sectors.

In any negotiations the Biden administration might engage in to advance any new policy with fiscal implications, it is also inevitable that the Republicans will try to use their leverage to extend Donald Trump’s 2017 tax cuts for companies and high-income earners, which would otherwise expire in the second half of this decade.

The prospects of a minimum tax rate for US companies and the adoption of the global minimum tax regime that the administration signed up for – and helped get nearly 140 countries to support last year – would be bleak. The Republicans don’t like any tax increases for business, even modest minimums (the proposed rate is only 15 per cent) and are also suspicious of multilateralism.

Apart from the unusually complex economic and geopolitical backdrop, however, never has the relationship between the Democrats and Republicans been so divided or poisonous nor the Republicans so captured by the extremes of the party.

The big issues for voters in the lead up to the elections have been economy-related. Inflation, interest rates (30-year mortgage rates have soared from 2.6 per cent to 6.4 per cent this year), housing and other asset values and fuel prices (even though they have been falling) are front-of-mind for votes.

Even though US inflation might have peaked, or be peaking – the latest numbers will be out on Thursday – it will remain elevated for some time and the Federal Reserve efforts to control it will ensure a sharp economic slowdown and probably, although not inevitably, a recession.

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While the Democrats might, with good reason, want to frame the election as a vote on the future of America’s democracy, it would seem it is those bread and butter issues that will determine the outcome and frame the shape of US economic policy, politics and even geopolitics for the remainder of Biden’s term.

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