US expected to get a ‘modest’ fiscal stimulus before year end

'Lame-duck session' of Congress will pass a bill focusing on small business loans and jobless benefits, says Pictet Wealth Management

New York's financial district. If President Trump wins the November 3 election, the US can expect more deregulation, loose fiscal policy, more tax cuts and a stronger US dollar, according to Pictet WeShow more

The US Congress is expected to approve a modest fiscal stimulus package, focusing on small business loans and extended unemployment benefits, when it meets for its "lame-duck session" after the November election, Pictet Wealth Management said on Wednesday.

A lame-duck session of Congress is a transitional period that occurs after the November elections, when it meets before a new presidential term begins in January.

“The upcoming income cliff will likely bring Congress together during the lame-duck session,” said Thomas Costerg, a senior US economist at the Swiss-based financial services company.

“The US government has reacted forcefully to manage the budget deficit, but there is need for more aid. There will be a moderate fiscal stimulus package on the table be it under Joe Biden or Donald Trump. No fiscal stimulus will be a threat to US gross domestic product growth in the fourth quarter.”

Mr Trump has raised hopes for a breakthrough in stimulus talks, saying he is willing to accept a large aid bill despite opposition from his own Republican party.

However, Mr Costerg said a second fiscal stimulus package will range between $750 billion and $1 trillion, well below the Covid-19 $2tn bill passed in March to boost the US economy. If Mr Biden wins Congress and the Senate, there will be a larger, green-focused stimulus package in the first half of next year, he added.

Mr Costerg said Mr Trumps looks set to lose the November election because of the economic shock of the pandemic and the sharp rise in unemployment. Citing earlier instances in which former US presidents Jimmy Carter and George Bush Senior lost their second terms because of shocks in the labour market, Mr Costerg said the US unemployment rate has increased from less than 4 per cent to 7.9 per cent this year.

Outlining different scenarios if either candidates win, César Pérez Ruiz, chief investment officer and head of investments at Pictet Wealth Management, said if Mr Trump wins, the US can expect more deregulation, loose fiscal policy, more tax cuts and a stronger US dollar. There will also be more confrontations with Iran on the nuclear deal as well as with China over the economy, technology and “to make them pay for the coronavirus”.

Meanwhile, if Mr Biden wins, there will be “stricter regulations, an increase in corporate tax, income tax and capital gains tax to fund the fiscal stimulus package, a weaker US dollar, multi-lateral policy style and reconsideration of the nuclear deal with Iran”, Mr Pérez Ruiz said.

He added that Mr Biden would take the US back to the Paris Agreement on climate change, while emerging markets will be a big beneficiary of a weaker US dollar.

However, both Mr Costerg and Mr Pérez Ruiz said US inflation is unlikely to pick up regardless of who wins the election. The US Federal Reserve is also likely to keep rates at zero during the entire mandate and continue with its quantitative easing strategy.

Mr Pérez Ruiz warned that the biggest risk facing markets is a contested election, saying all asset classes adopted a risk-off approach in 2000, when it took more than five weeks to declare former president George W. Bush the winner in a tightly contested race with former vice president Al Gore.

“A contested election is something that markets today have not priced in significantly,” he said.

The financial advisory firm recommended investing in the forex market to protect portfolios from future volatility. The euro and Japanese yen could be used to protect against a potential non-defined US election outcome, Mr Pérez Ruiz said.

Highlighting market risks, he added that the number of US companies with $50 million or more in liabilities filing for Chapter 11 bankruptcy is higher today than in the previous downturns.

“In 2002, companies linked to computers, software and telecom were filing for bankruptcy, in 2008, finance and auto companies were going bust, while in 2020, it is the service industry that is suffering the most," he said.