B. Riley Wealth Management Advisor Talking Points: Short-Term Economic Risks – Long-Term Market Outlook

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Short-Term Economic Risks – Long-Term Market Outlook

Year-to-date, the S&P 500 Index is up a surprising 14.5%, and for the past year, it is now up 18.8%. The tech-heavy NASDAQ Index is up 38.9% year-to-date, and it is currently up 45.5% for the past year.

However, I remind investors that the stock market continues to be overvalued.  According to Factset, the forward 12-month Price Earnings Ratio (P/E) for the S&P 500 Index was 22.0 as of Friday. That means the S&P 500 Index could be overvalued by more than 26% compared to the 5-year forward P/E average of 17.4.

The Economy Is Slowing And Could Stall In Early 2021

I have warned investors over the past couple of months they should not be surprised to see a 10% or more pullback or correction from current prices in early 2021. This would be the start of a normal, healthy reversion to the stock market’s long-term trend of a forward P/E ratio of 17.4.

What Could Trigger A Large Stock Market Pullback In Early 2021?

According to CDC epidemiologists, the nation’s healthcare infrastructure is on the verge of being overwhelmed.

We are currently in a nationwide third spike of hospitalizations as a result of Halloween.  The CDC expects the fourth spike, due to Thanksgiving travel, to begin around December 15 and a major Christmas/Hanukkah/New Year fifth spike to begin the second or third week of January 2021.

Sometime between now and January, we will likely see major lockdowns of cities throughout the United States.

Epidemiologists believe that a full lockdown is inevitable if the nation’s healthcare infrastructure is at risk of collapsing.

The stock market will react negatively to any new nationwide lockdown.

It is essential to understand that such a pullback will be an entirely normal and healthy correction because the stock market is overvalued.  Sometimes the markets get ahead of themselves and then they need to adjust. That could happen in the first quarter of 2021.

What To Expect From The Stock Market Next Year

This is not a time to panic or get out of the stock market.  In the long term, the stock market will thrive in 2021.  The new COVID-19 vaccines are expected to return the nation to some semblance of normal by the end of the year.

The CDC believes the strain on the healthcare infrastructure will start to abate in late February.

Also, the expected stimulus package and infrastructure legislation from the Biden Administration should make 2021 an excellent year for the stock market after the first quarter.

2021: How Will Biden Change Businesses & Industries?

Over the past three weeks, I have been pouring through analysts reports, Wall Street forecasts, trade association and industry group reports on what sectors and industries will do best and which will do worst in (1) a new Biden Administration and (2) as the U.S. returns to normal after the Coronavirus pandemic has ended.

Depending on the outcome of the January 5th Senate runoffs in Georgia, it looks likely that we will have a divided government for the next two years.  If Republicans win as expected, their control of the Senate will significantly limit Biden’s policy options.

Here is a look at how the Biden administration might shape critical industries and issues over the next two years.

Energy

The Biden administration has promised major changes for energy companies and on climate change.  Limited by a Republican-controlled Senate, Biden will only be able to use his executive powers and administrative agencies to overturn Trump’s environmental executive orders and institute those of his own.

This is what Biden can do:

  • Biden will order the U.S. back into the Paris climate pact.
  • Biden will start negotiations for new climate rules on cars and trucks.
  • Biden will slow or halt oil leasing on federal lands.

This is what Biden will not be able to do:

  • No Green New Deal.
  • No $2 trillion spending to reduce the nation’s greenhouse-gas emissions.
  • No government financial incentives on renewable energy.
  • No specific goals for eliminating greenhouse gas emissions by 2050.

Autos

This is what Biden can do:

  • We will see a replay of Obama-era policies on electric vehicles.
  • Stricter auto-emission limits.
  • Biden’s infrastructure bill could include his plans for installing a half-million charging stations nationwide. This could be a boost for Tesla (TSLA), General Motors (GM), and other car companies planning to sell more battery powered vehicles.
  • Biden will propose stricter fuel economy regulations for the auto industry.
  • Biden will also work with California and other states on aligning requirements for emissions. This could bring more certainty for car executives trying to plan future models.

Tech & Information Technology

This is what Biden can do:

  • Democrat’s concerns about Tech are about anti-competitive practices, privacy, and the treatment of gig workers.
  • Biden will stress the need for China to play by international rules in its race for Tech supremacy. Biden will carry through on national security concerns about the popular Chinese-owned social media app TikTok.
  • Biden will be more Tech friendly in allowing significantly more H-1B visas for foreign professional tech talent.
  • Increased R&D funding for emerging technologies like artificial intelligence, 5G and quantum computing.
  • Biden’s infrastructure legislation will include money for an expanded 5G nationwide rollout in rural areas.
  • Biden will take aggressive enforcement actions against China for cyber espionage and intellectual property theft. He may end up tougher than Trump on these national security issues.
  • Biden will offer tax incentives to bring supply chains and the manufacturing of critical technologies back to the U.S.

Trade

This is what Biden can do:

  • Biden will re-join the Trans-Pacific Trade Partnership with 11 other Pacific Rim nations.
  • Biden’s overall trade policy will promote a collaborative approach to trade with allies, who have been battered by Trump’s sanctions.
  • Biden will also rethink the use of tariffs in a more organized way and will work with other nations to create a united front to confront China.
  • Like Trump, Biden views the rise of China’s tech companies as threats to U.S. tech companies and believes they are vehicles for Chinese espionage.
  • Biden would also use tariffs such as quotas on imports from nations that don’t meet climate targets.
  • Unlike Trump, Biden will consult with allies before acting on trade, especially when it comes to China.

This is what Biden will not be able to do:

  • Biden will inherit tariffs on roughly three quarters of everything China sells to the U.S.
  • Biden will also need to enforce the Chinese purchase targets in the current Phase 1 Trade Deal with China.

Manufacturing

This is what Biden can do:

  • Biden will boost federal spending on programs to develop domestic manufacturing.
  • Biden will not reduce trade restrictions and tariffs created by the Trump Administration.
  • Biden will be reluctant to negotiate free-trade agreements that could jeopardize blue-collar jobs in Midwestern states.
  • Biden will push for Buy American requirements on federally funded projects and other incentives for manufacturers to invest in domestic production.
  • Biden believes he can get enough Republican votes for a $2-$3 trillion infrastructure spending bill as part of a stimulus program.

Agriculture

This is what Biden can do:

  • Biden’s less erratic trade policies could ease the market swings that have hurt farmers over the past three years.
  • It is unclear whether Biden will continue Trump’s record-high government payments to farmers. Biden has pointed out that this aid comes at a cost to taxpayers.
  • Farmers are expecting more aggressive Obama-era regulations on farmers. Water regulations and federal regulations on drainage ditches and rain-formed ponds will be first on the Biden regulatory agenda.
  • Biden’s Agriculture Department wants farmers to adopt more environmentally friendly practices, such as capturing carbon in soil by keeping fields covered with vegetation during non-growing seasons.

Banking

This is what Biden can do:

  • The financial industry is expecting heightened regulations from the Biden administration.
  • The Consumer Financial Protection Bureau (CFPB) is expecting the Biden administration to ramp up all watchdog enforcement activities, especially around payday lenders and debt collectors.
  • The CFPB is an area where Mr. Biden can and will make changes immediately because the Supreme Court ruled this year that presidents can fire the CFPB director at will.
  • Many bank borrowers have been allowed to skip payments on credit cards and personal loans during COVID-19. The CFPB will have new regulations to protect these borrowers.
  • Banks expect all of their customer fees to be more regulated.

This is what Biden will not be able to do:

  • Biden won’t be able to replace Federal Reserve Chairman Jerome Powell until his term expires in February 2022.
  • Biden won’t be able to replace Federal Deposit Insurance Corp. Chairman Jelena McWilliams until her term ends in June 2023.

Pharmaceutical Industry

This is what Biden can do:

  • Biden will try to lower the costs of prescription drugs, including giving the federal government more control over what it pays for medicines, which could hurt industry sales.
  • Biden has said he would set up an independent government board to determine prices paid by most government purchasing programs, like Medicare.
  • Biden is not expected to authorize the importing of drugs from abroad or to peg prices Medicare pays for unspecified drugs to the rates other countries pay.
  • Biden’s expected expansion of health insurance coverage would mean more government purchases of prescription drugs and higher sales.

This is what Biden will not be able to do:

  • If the Senate remains controlled by Republicans, major drug pricing legislation will be difficult to achieve.
  • Biden has also proposed the government directly negotiate with drugmakers for discounts on medications. Medicare can’t do this under current law.

Health Insurers and Hospitals

This is what Biden can do:

  • Biden is expected to expand the federal government’s role in responding to the pandemic, which could create problems for insurers who have made significant profits this year with a drop-off in many typical medical procedures.
  • Biden is expected to ask insurers to pick up the cost for expanded testing or eliminate out-of-pocket costs for COVID-19 treatment.
  • Under Biden, hospitals could see a welcome increase in patients covered by health insurance.

This is what Biden will not be able to do:

  • Biden has supported a Medicare-like public option for the uninsured. Insurers have opposed this.  This would probably need Senate approval, which is unlikely.
  • The Affordable Care Act has overall benefited the health care industry by expanding its rolls and revenue. Biden is unlikely to pass any significant changes that expand coverage with a Republican Senate, but his administration could make regulatory changes that could bolster enrollment in existing programs.

Retail

This is what Biden can do:

  • Labor issues are expected to be high on the Biden agenda, forcing higher costs on retailers.
  • Trade policies and tariffs with China have disrupted many Retailer supply chains during Trump’s term in office. Retailers do not expect tariffs to disappear under Biden.
  • Biden’s policy on raising the minimum wage to $15 an hour would hurt many smaller retailers.
  • Biden will also push for more protections for unionized workers, including prohibiting employers from discriminating against those who participate in strikes.

Small Business

This is what Biden can do:

  • Biden supports changes in the Paycheck Protection Program, including strengthened oversight and a guarantee that every eligible business with 50 employees or fewer would get government relief.
  • Biden has proposed expanding small businesses’ access to capital through a new fund that would receive $30 billion in initial federal funding, including directing $10 billion to state and local programs that provide venture capital.

 

NOTE: This report is authorized for distribution to clients

Paul Dietrich, Chief Investment Strategist, B. Riley Wealth Management

Paul Dietrich is focused on managing investments for private investors, retirement funds, and private institutions throughout the United States. He also serves as a frequent on-air commentator. He regularly contributes market analysis to business and financial media, including CNBC, Fox Business, Bloomberg TV, CNN, The Wall Street Journal, Yahoo! Finance, Reuters, and The Washington Post.

IMPORTANT DISCLOSURES:

Information and opinions herein are for general use; are not unbiased/impartial; are current at the publication date, subject to change; may be from third parties, and may not be accurate or complete. Past performance is not indicative of future results. This is not a research report or solicitation or recommendation to buy/sell any securities. B. Riley Wealth Management is not engaged in rendering legal, accounting, or tax preparation services. Opinions are the Author’s and do not necessarily reflect those of B. Riley Wealth Management or its affiliates. Investment factors are not fully addressed herein. For important disclosure information, please visit  www.brileywealth.com/legal-disclosures.

 

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