MIKE TOWNSEND: After every Inauguration Day, the nation’s capital gets overrun by clichés.
It’s a new day, it’s the dawn of a new era, it’s a new beginning, it’s time to the turn the page, it’s time to come together, it’s time to put differences aside, it’s time to get started, we need to focus on what unites us not what divides us, hope springs eternal—they’ve all been tossed around in the past week, since Joe Biden took the oath of office as the nation’s 46th president on January 20, in a subdued ceremony held amidst unprecedented security in the nation’s capital and without the hundreds of thousands of spectators that would normally attend.
This was my seventh inauguration since I moved to Washington more than 27 years ago, and they have all been memorable in their own way.
This year’s ceremony will be remembered, at least for me, for three things: Kamala Harris taking the oath of office as the first female vice president in the nation’s history; the fact that there were far more soldiers at the inauguration than there were actual attendees; and the stunning spoken-word poem delivered by 22-year-old Amanda Gorman—her powerful voice and optimism for the future was inspiring.
Perhaps more than anything else, though, the inauguration went off without a hitch. There were no big protests, disruptions, or violence, and it seemed to strike the right tone for a nation still in the midst of a once-in-a-century pandemic.
Now, of course, to use another cliché, the real work gets started. The new administration faces an enormous set of challenges, from the pandemic and the struggling economy to profound racial and political divides that won’t be bridged by a fabulous poem or a speech from the new president.
So what can we expect from the new names and faces moving into offices around the nation’s capital as the Biden administration settles in?
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and the confusion of the nation’s capital and help investors figure out what’s really worth paying attention to.
On my last episode, I focused on what the narrowly divided Congress means for the policy agenda in 2021 and beyond.
This week, I turn my attention to the new administration, for an in-depth look at the key players and how the decisions they make over the next two years could have significant ramifications for investors and the markets.
But first, an update on the top stories of the week.
The biggest news of last week, of course, was the inauguration. But I’ll leave the parsing of Joe Biden’s inaugural address to others. What I was watching was the market reaction.
The markets have been up modestly in the first days of the Biden presidency—continuing a trend that has seen the largest market rally between Election Day and Inauguration Day in history: The S&P 500® rose about 14.3%between November 3 and the close on January 20.
That broke the previous record, held by Herbert Hoover between Election Day 1928 and Inauguration Day in 1929, a 13.3% rise in the markets. It should be noted, however, that Hoover was not inaugurated until March 4, of 1929, so he had about six more weeks of market performance. Of course, six months later in 1929, the market crashed, kicking off the Great Depression, so let’s hope history doesn’t repeat itself.
As always, it’s impossible to attribute market performance to any one factor, so the market surge since November isn’t all about who won the election. But there’s little question that the market is anticipating another round of economic stimulus and an emphasis on speeding up vaccine distribution in the first weeks of the new administration.
I also think that the market is, to at least some degree, anticipating that the Biden presidency will just be … calmer … than that of his predecessor. Former President Trump’s tweets moved the markets countless times over the last four years—a phenomenon that was well documented. That’s not likely to be the case over the next four years. Washington still will play a key role in the markets and investing strategies—if it didn’t, I wouldn’t have a podcast. But with a quieter approach in Washington, it’s unlikely that we’ll see the kind of short-term reactions from the markets that we saw over the past four years.
The other major news of January 20 was that the much-discussed Senate deadlock officially began. Just hours after taking the oath of office as vice president, Kamala Harris was on the Senate floor to swear in her appointed successor to her California Senate seat, Alex Padilla, as well as the winners of the January 5 twin runoff elections in Georgia, Jon Ossoff and Raphael Warnock. With the arrival of the three Democrats, there are now 50 Republicans and 50 Democrats, including the two independent Senators who caucus with the Democrats. With Vice President Harris holding the tie-breaking vote, Democrats have the narrowest of majorities. Long-time Senator Chuck Schumer of New York is the new Senate majority leader.
But in a preview of just how difficult life in an evenly divided Senate will be, Schumer and his counterpart, Minority Leader Mitch McConnell of Kentucky, spent the first week of the 50-50 Senate sparring over the details of how to operate the chamber. Senators must agree to an operating resolution at the beginning of each Congress. It’s how the two parties determine how many seats each party will have on every Senate committee, how resources for paying staff and office space will be allocated—basically, the nuts and bolts of operations.
Without this operating resolution, the Senate cannot move forward with legislative business. Now, this usually is not a particularly big deal—when there is a clear majority, history says that the majority party gets more seats on committees and a larger percentage of the resources for staff and such.
In the case of a 50-50 tie, things are a little bit more complicated. But there is a precedent from the last time the Senate had a 50-50 tie, in 2001. That agreement provided for equal division of committee members, funding, office space, and more. A crucial element of the 2001 deal addressed a particular quirk in Senate rules, which is that a tie vote in a committee means that the bill is defeated and cannot advance to the Senate floor for a vote. In 2001, the two sides agreed that a tie vote would still allow the bill to move forward to the full Senate.
Here in 2021, both sides are onboard with using the precedent from 2001, but the two leaders squared off on one item: Minority Leader McConnell’s request that the agreement include a pledge from Democrats that they won’t eliminate the filibuster in the next two years. Schumer would not agree to that.
Ending the filibuster can be done by a simple majority vote—so Democrats have the ability to do it if they choose. Many in the party want to see it happen, arguing that it is the only way to overcome the intransigence of the minority party. But Democrats are not united on eliminating the filibuster—moderates like Senator Joe Manchin of West Virginia and Senator Kyrsten Sinema of Arizona have publicly opposed the idea, and others in the party have expressed concerns as well. Notably, President Biden’s press secretary reiterated last week that the new president—who spent more than three decades as a senator and has a reverence for the institution and its history—is not in favor of eliminating the filibuster.
But Biden, Manchin, and others might change their minds in the coming year if they get frustrated enough by Republican opposition to their agenda. And that possibility is why Schumer could not agree now to take eliminating the filibuster off the table. After nearly a week, McConnell gave in, dropping his request and agreeing to let the organizing resolution be finalized.
In the end, it was a relatively minor kerfuffle. But it made clear that though Republicans may be in the minority, they don’t plan to make things easy for Democrats in the Senate.
One thing that the two Senate leaders did agree on is plans for a second impeachment trial for former President Donald Trump. The House voted to impeach the then-president on January 13 for his role in inciting the riot at the U.S. Capitol a week earlier, but the House did not deliver the article of impeachment to the Senate until Monday, January 25. The Constitution requires that the Senate trial start at 1 p.m. the day after the article is received. Senators were sworn in to their roles as jurors, but the two sides agreed to delay the formal start of the trial until February 9.
This compromise works for both parties. For Democrats, it means the Senate can spend this week and next focused on confirming as many of President Biden’s Cabinet nominees as it can.
For Republicans, it gives the former president’s legal team time to prepare its defense.
Of course, neither party is particularly happy with the prospect of a drawn-out impeachment trial. For Democrats, a trial of the now-former president takes up time and takes attention from the new administration’s agenda. For Republicans, it keeps the former president and the riots of January 6 in the headlines.
It’s not clear how long this trial will take. The 1999 impeachment trial of President Clinton took five weeks, while last year’s first trial of Donald Trump lasted about three weeks. Both sides would like to move more quickly this year. The Senate is currently scheduled to be in recess for the week of February 15 in observance of the Presidents Day holiday. If the trial starts on February 9 and isn’t wrapped up by the end of that week, it’s not certain whether senators would give up the recess week to continue the trial.
No matter how the trial ultimately plays out, one thing is certain—the Senate will be pre-occupied with it for a decent chunk of February. And that pushes every legislative issue, including President Biden’s proposed economic stimulus package, to the sidelines for as long as the trial lasts.
The narrow margins in the House and Senate will continue for at least the next two years, until the 2022 mid-term elections. That means that to move forward, the two parties will need to find ways to work together. This is something I’ll be following in
a new segment of the podcast called Signs of Bipartisanship. In his inaugural address, President Biden used the word “unity” eight times—he’s been clear that one of the goals of his presidency is to bring a deeply divided nation together again. The reality on Capitol Hill, however, is that common ground will be difficult to come by. In this segment, I’ll look at ways in which the two parties are trying to work together—or failing to work together—on some of the key issues.
This week, I’m watching the negotiations over President Biden’s economic stimulus and coronavirus response plan. The president has outlined a $1.9 trillion package that includes $1,400 stimulus checks; an increase in the enhanced unemployment benefits from $300 to $400, plus an extension of that program for six months; money for state and local governments; money to help re-open schools; money for vaccine distribution; and much more.
President Biden has said he would like to get bipartisan support for the plan, but in the Senate, he would need to hold together all 50 Democrats and attract the support of at least 10 Republicans in order to get to the 60-vote supermajority needed to overcome a filibuster. That seems unlikely. The White House did hold a call last weekend with a bipartisan group of 16 Senators—8 Republicans and 8 Democrats—to get a sense of their enthusiasm for the president’s plan.
The White House officials on the call promised to listen to concerns and answer questions from members of both parties—and, to their credit, that is reportedly exactly what happened. But they heard a lot of concerns and questions. Even the most moderate Republicans on the call thought the price tag was too high, that the new administration should more narrowly target relief to those who need it most, and that the administration has not yet made the case for why such a large package is needed just weeks after Congress agreed to a $900 billion stimulus package in late December.
There were areas of consensus, with the broadest agreement coming on the need for more spending on vaccine distribution. And while there is some disagreement over exactly who should get the $1,400 stimulus checks, there appears to be bipartisan support for the most needy Americans to get another round of payments.
The takeaway here is simple. While the Biden administration deserves credit for making the effort to reach across the aisle, there is virtually no chance of finding ten Senate Republicans to support the plan outlined by the president. And, at least at the moment, it’s not even clear that all 50 Democrats are on board.
So what’s going to happen with the stimulus package? Well, expect Democrats to turn fairly quickly to using the budget reconciliation process—that’s the special parliamentary procedure that would allow a stimulus bill to pass with a simple majority vote.
But the budget reconciliation process is a cumbersome one that has a number of steps to it—and these steps take time. With the Senate tied up for part of February with the impeachment trial, the odds of a stimulus package being completed before the end of next month are getting very low. Mid-to-late March seems like a more realistic timetable. The market seems to be already pricing in more stimulus, and investors may get antsy with the delay. We’ll see.
In my Deeper Dive segment, I want to take a closer look at the new administration by focusing on the key players that investors need to know. In Washington, it is often said that “personnel is policy,” meaning that you can tell a lot about what the policy agenda will be by looking at the people who will be making policy decisions.
With that in mind, here are five members of the new administration whose decisions in the coming months are likely to have the most direct impact on the markets and investors.
At the top of the list is Janet Yellen, who was confirmed earlier this week as the Secretary of the Treasury—the first woman to hold the position in the 231 years it has existed. Yellen will be the point person for the administration on the economic recovery.
Yellen is, of course, a known quantity from her four years as chair of the Federal Reserve. Given that background, investors can expect close coordination between the Treasury and the Fed in the years ahead. That kind of collaboration was true in the previous administration, for the most part, until a high-profile dispute between then-Treasury Secretary Steven Mnuchin and Fed Chair Jerome Powell in the final weeks of 2020 over whether to preserve emergency lending programs designed to shore up the economy. The dispute alarmed some investors who worried that suddenly the Treasury and the Fed were not on the same page anymore. Expect Powell and Yellen to return to the collaborative model.
But Yellen’s bigger influence on the market may be how she positions herself on issues like the economic recovery, the need for more fiscal stimulus, whether the economy is ready for tax increases, and the regulation of big banks.
During her confirmation hearing before the Senate Finance Committee earlier this month, Yellen responded to dozens of questions on these topics during the hearing itself, and then provided 114 pages of written responses to follow-up questions days later. On most issues, she was non-committal, as is common in these types of situations.
My top takeaways from her comments at the hearing and in her written responses:
First, she’s a strong advocate of the stimulus package—echoing Fed Chair Powell’s comments that more fiscal stimulus is needed to jumpstart the economy, as well as his view that concerns about the impact of more stimulus on the federal deficit should be set aside to address immediate needs.
Second, she expressed support for the idea of increasing the corporate tax rate by a modest amount.
And third, she declined to support a financial transaction tax, a modest tax on all stock and bond transactions that has been promoted by some Democrats. Yellen said that such a tax would significantly damage the capital markets by increasing trading costs, decreasing trade volume, and reducing liquidity. She noted that President Biden has not included a financial transaction tax in his official tax policy platform. For investors, this was an important statement. While I think that financial transaction tax proposals will continue to percolate on Capitol Hill, it’s clear that, for now, they will not be a priority for the new administration.
Yellen has a huge job ahead of her. But the Senate’s strong vote of 84 to 15 to confirm her is a clear signal that she has the confidence of both parties that she can succeed.
The second name to know is Gary Gensler, who has been nominated by the president to be the next chair of the SEC, the Securities and Exchange Commission, which has responsibility for regulating the nation’s capital markets.
The SEC is a five-member commission, with three members belonging to the party that holds the White House and two commissioners from the minority party. There are currently two of each, so Gensler, once confirmed, will give Democrats a 3-2 advantage.
Gensler has a long history in Washington. He served as the chair of the Commodity Futures Trading Commission from 2009 to 2014, during the Obama administration. That’s the agency that regulates the commodities and derivatives markets. He developed a reputation there as a tough enforcer, willing to stand up to Wall Street.
Perhaps no one in the new administration will have a more direct impact on the markets over the next four years than Gensler. Expect the SEC to beef up its enforcement efforts and be tough on things like insider trading and advisors or companies that mislead investors.
In terms of what else the agency will focus on, it’s mostly speculation at this point, but one priority for Gensler and his Democratic colleagues at the SEC is likely to be enhancing public company disclosures to increase the amount of information investors get on things like a company’s efforts to combat climate change, to promote a more diverse and inclusive workforce, and to make more transparent executive compensation, particularly in comparison to the average worker at a company.
Gensler may also seek to roll back regulations put in place over the last four years by an SEC that investor advocates called too friendly to Wall Street. Recent rules that make it harder for shareholders to bring issues to a vote in the proxy process and that outline the standards for financial advisers giving investment advice could get a review under Gensler’s watch.
Cryptocurrency is another area of the market that could see more attention in the coming months and years. Since 2018, Gensler has been a member of the faculty at MIT’s Sloan School of Management, where his teaching and research has focused on blockchain, digital currencies, and financial technology.
These issues will be on the front burner at the SEC. Coinbase, the largest cryptocurrency exchange by volume, has filed for an initial public offering. Asset managers have filed with the SEC to create the first Bitcoin exchange-traded fund, something that has been rejected multiple times by the SEC in the recent past. Even the Fed is exploring the uses of a digital currency.
The previous SEC chair, Jay Clayton, was openly hostile to cryptocurrencies, particularly as an investment option for individual investors. It’s not clear how Gensler would address these issues, but it seems almost inevitable that he will have to do so.
Gensler’s confirmation process with the Senate Banking Committee has not even begun, so it’s likely to be a few weeks before he gets confirmed. But once he does, he has the potential to shape a far-reaching policy agenda with direct impact on the markets and all investors. Expect Gensler to position himself as a forceful advocate for the ordinary investor, willing to push back on Wall Street resistance.
The third name to know is Marty Walsh, who is Biden’s nominee for Secretary of Labor. Walsh has been the Mayor of Boston since 2014 and is a former union leader. If confirmed, he would be the first union member to rise to Labor Secretary in nearly half a century. But Walsh earned a reputation in Massachusetts as a pragmatic dealmaker who forged good relations between labor and corporate management.
Given his background, Walsh is expected to be a fierce advocate on bread-and-butter labor issues like workplace safety, the battle to increase the minimum wage, and pay equity, while also taking a lead role on the increasingly important issue of how to classify workers in the gig economy—decisions that could have a profound effect on companies like Uber and Lyft in the years ahead.
But that’s not the main reason Walsh is on the list of key officials for investors to watch. One of the Department of Labor’s other responsibilities is regulating workplace retirement savings plans, through a branch of the department called the Employee Benefits Security Administration.
Among the key issues expected to be on the retirement agenda at the Labor Department are whether retirement plans should be able to offer “socially responsible” investment options to their plan participants—investments that focus on environmental issues, social justice issues, good government issues. The Trump administration approved regulations late last year that made it more difficult for plan sponsors to offer these kinds of funds as options for retirement investors. But the new administration is expected to quickly move to re-examine those rules.
Another rule passed in the waning days of the Trump administration focuses on how savers get advice about the investment options in their plan, part of a long-running debate at the Labor Department over “fiduciary duty” that has spanned administrations of both parties. The new rules govern the responsibilities investment advisers have when providing advice to retirement plan participants.
But the rules that were approved by the Trump administration are not scheduled to go into effect until February. Under federal law, regulations that are approved at the last minute by the outgoing administration can be delayed and eventually overturned by the incoming administration. Indeed, on one of his first days in office President Biden signed an executive order that gives every federal agency the option to delay rules in exactly these circumstances. So investors can expect further debate in the months ahead about whether the new rules need to be toughened up.
Number four on my list: Rohit Chopra, the nominee to be the new director of the Consumer Financial Protection Bureau, also known as the CFPB.
The agency was created as part of the 2010 Dodd-Frank Act, the sweeping overhaul financial regulation that came out of the 2008 financial crisis. Republicans have long opposed the agency, and it was marginalized for much of the last four years during the Trump administration.
But expect the CFPB to take a much more prominent role in the new administration. The agency’s primary jurisdiction is over products that everyday consumers of financial services rely on—deposit accounts at banks, credit cards, mortgages, auto loans, and student loans, in particular.
Chopra was one of the original architects of the agency when it was getting set up in 2010, and he became its first “student loan ombudsman.” Chopra will likely focus on student loans in his return to the agency this year, particularly given the ongoing discussion in Washington about the new administration possibly forgiving some student loan debt as part of the economic recovery. Chopra is also expected to lead the agency in enforcing fair-lending rules and protecting consumers against unfair and abusive practices by financial institutions, including non-banks like payday lenders.
The CFPB has broad powers that can touch just about every American who uses a credit card, buys a house or a car, or borrows to pay for college. We can expect the agency to be much more visible in 2021 and throughout Biden’s presidency.
And my last pick for names to know is Rebecca Kelly Slaughter, the acting chair of the Federal Trade Commission. Now, I recognize that the average person can go through an entire life without knowing or caring about the Federal Trade Commission. But stick with me here.
One of the big roles of the Federal Trade Commission is to oversee regulation of big tech companies—and that’s an issue guaranteed to be in the spotlight in 2021.
Slaughter may not get the nomination to be the permanent chair at the commission, but she is two years into a seven-year term, so even if President Biden picks someone else as the permanent chair, Slaughter will play a prominent role in looking at the tech companies over the next several years. The Biden administration has prioritized reining in big tech companies, cracking down on anti-competitive behavior, expanding internet access, and rethinking the so-called “Section 230” protections afforded to social media companies that shield them from liability for what users say on their platforms.
The FTC will play a big role in deciding these questions—and that has a potentially enormous impact on a slew of companies that investors love, including Apple, Amazon.com, Facebook, and Google. I expect we will get to know about this relatively obscure agency in Washington in the months ahead.
All five of these individuals are new to their positions, and we will hear a lot more from them in the weeks ahead. But there’s one familiar name to keep in mind: Fed Chair Jerome Powell. Powell’s term as chair lasts for another year—until early February of 2022. It’s certainly possible that President Biden could nominate him for another term as chair, but that’s unknowable at this point. What we do know is that Powell will be at the helm during what is almost certain to be an extremely consequential 12 months for the Fed, as it seeks to ensure that its monetary policy supports and bolsters the anticipated economic rebound.
And while President Biden won’t have to make a decision about Chair Powell for a year, he does have one vacancy on the seven-member Fed Board of Governors that he will get to fill sooner than that. No word yet on who that individual might be, but I expect a nomination for the open Fed seat in the coming weeks.
Finally, in my Why It Matters segment, I take a look at something you may have missed and tell you why I think it’s important for investors.
This week, it’s a surprise retirement announcement from the Senate. Ohio Senator Rob Portman, a Republican, announced this week that he will not be seeking re-election in 2022. Portman was first elected to the Senate in 2010 and re-elected in 2016. But his career in Washington goes back much further than that. He served six terms in the House of Representatives from 1993 to 2005 and then served as U.S. Trade Representative and later as Budget Director in the George W. Bush administration.
In announcing his decision, which comes just weeks after he said that he planned to run for another term, Portman said, “It has gotten harder and harder to break through the partisan gridlock and make progress on substantive policy, and that has contributed to my decision.”
That’s an important statement coming from someone who has built a reputation on working with colleagues from across the aisle on a wide variety of issues. And it’s a troubling statement about the state of the Senate today.
So why does this matter to investors? Because one of those issues on which he built a rock-solid record of bipartisanship was retirement savings. Portman and his Democratic colleague Senator Ben Cardin of Maryland have worked together on retirement issues dating back to their days in the House of Representatives in the 1990s, when they championed increased contribution limits.
Portman and Cardin will be pushing a new retirement savings bill, one that would increase the required minimum distribution age to 75, allow savers to contribute more to their accounts after the age of 60, and take dozens more steps to increase retirement savings opportunities for people of all income levels. You’ll be hearing about this effort from me later this year as this bipartisan bill is expected to have a real chance of passing Congress in 2021. And with this week’s announcement, Portman is sure to fight hard for passage of this bill because it could be one of the capstones of his career.
Portman becomes the third Republican senator to announce he is not running for re-election in 2022, following in the footsteps of Pennsylvania Senator Pat Toomey and North Carolina Senator Richard Burr, both of whom announced their intention to retire late last year. Several more senators from both parties are also on retirement watch, so more announcements could be forthcoming.
Senators who are not running for re-election often become wildcards on Capitol Hill. Free from worrying about how their decisions might affect their re-election chances, they often become more willing to work in a bipartisan manner, or to buck their party leadership on occasion. In a 50-50 Senate, wildcards are very much worth watching. As a result, I’ll be keeping my eye on Portman, Toomey, and Burr.
Well, that’s all for this week’s episode of WashingtonWise Investor. I’ll be back in two weeks with a great guest—Schwab’s Chief Investment Strategist Liz Ann Sonders—to talk about how the market is reacting to the first weeks of the Biden presidency.
So please take a moment now to subscribe so you don’t miss an episode. And if you like what you’ve heard, leave us a rating or a review on Apple Podcasts or your favorite listening app—those ratings and reviews really do matter.
For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.