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Market MovesDecember 16, 2020

Maybe Joe Biden and Mitch McConnell Can Actually Work Together

Northern Trust’s Browne is optimistic that the new president is simpatico with the GOP Senate leader, who blocked many Obama initiatives.

By Larry Light

There’s much hand-wringing on Wall Street and in Washington over whether further federal stimulus will be a non-starter in a divided Washington. Northern Trust, though, thinks everything will work out—due to personal chemistry.

With Democrat Joe Biden headed for the White House and the House of Representatives in his party’s hands, the sticking point would be if the GOP retains control of the Senate. If so, Biden and Senate Majority Leader Mitch McConnell likely could strike a compromise, said Northern Trust CIO Bob Browne in an interview.

Browne noted that Biden and McConnell know each other well and served together for decades in the Senate. During the Obama administration, McConnell got a reputation for obstructing most of the Democratic president’s initiatives, including on health care and judicial nominations.

Some studies show that when Congress is split, stocks do the best. Certainly, no one knows if up ahead that would be a recipe for fruitless gridlock when the nation needs to march forward united or genuinely good for government and society.

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Up until now, McConnell, a Kentucky Republican, has been disputing the size and composition of another round of stimulus measures for 2020. For months, he has insisted on legal shields for businesses that would protect against lawsuits from coronavirus-stricken employees. He has also opposed Democrats’ push for further financial aid to state and local governments before Congress adjourns ahead of the presidential inauguration.

But as of Tuesday, he shifted toward accepting a bill that is shorn of those two positions. That likely helped stocks rally, with the S&P 500 climbing 1.3% Tuesday, ending a four-day losing streak.

Assuming that this package passes before the current Congress adjourns, Biden wants to get a bigger virus-relief spending bill through in the new session that convenes in January. The president-elect calls the present proposal “a down payment.” McConnell has qualms about that stance.

Nonetheless, Browne, the Northern Trust CIO, thinks that the new president and the GOP chief will get along much better in 2021 than when President Barack Obama was around. “McConnell knows Biden and views him as less liberal than Obama,” Browne said. Still, if the economy comes roaring back in 2021’s first half, then “Biden will have a harder time with another $1 trillion” in new spending, Browne said, given McConnell’s growing reservations about ballooning the federal deficit further.

To be sure, much hinges of the outcomes of the twin runoff contests in Georgia, a longtime red state that Biden narrowly captured in November. If the two Republican candidates win, then the partisan division is 52-48 in their party’s favor. If they don’t, then the split is 50-50, with Biden’s vice president, Kamala Harris, breaking any tie votes.

Beyond the Capitol Hill drama, Northern Trust, in its 2021 outlook report, noted that Biden nominating former Federal Reserve Chair Janet Yellen as his Treasury secretary “signals increased coordination between government stimulus and monetary policy.” Her successor as Fed chief, Jerome Powell, is staunch in his dedication to keeping interest rates low and buying financial assets, mainly Treasury bonds, as well as encouraging Congress to pass more relief aid.

“This should support the economic recovery from the pandemic,” the Northern Trust report stated.

Public Pensions Fail to Rebound with Market Rally

Report says the worst of the COVID-19 recession has ‘yet to be fully felt by state governments and public retirement systems.’

By Michael Katz

Despite a decadelong bull market and a strong rebound during the second half of this year, the total funded ratio for statewide US pension plans is near its lowest point in modern history, according to a new report from the Equable Institute, a bipartisan nonprofit group that focuses on public retirement plans.

Equable Institute’s analysis of statewide public pension funds forecasts that their aggregate funded ratio will decline to 69.4% this year from 72.9% last year, with a funding shortfall of $1.55 trillion. And as of September, the average return among the pensions for 2020 was only 2.14%—far below the 7.17% average assumed rate of return (and falling) for the pension funds.

“This year’s investment underperformance means more unfunded liabilities and higher contribution rates in the coming years from school districts, cities, and state agencies,” Anthony Randazzo, executive director of Equable Institute, said in statement. “The good news is that most pension funds did not lose money this year, after a strong rebound from lows in March. The bad news is that pension funds are doing more than just trying to make a return above 0%.”

Randazzo noted that several plans continued lowering their assumed rates of investment return in fiscal year 2019, adding that “if there is one legacy from the pandemic for state pension funds, it is that they should look hard at how much risk they are taking with their current investment assumptions.”

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Although most state pension funds missed their investment targets in fiscal year 2020, many of the financial losses during the first quarter been recouped and then some, noted the report. However, it also said that over the coming years, state pension funds still face the challenge of highly optimistic investment assumptions in a low interest rate environment.

According to the report, states will be faced with significantly decreased revenue in 2021 and some will likely pass the costs on to public employees. It also said that headwinds related to fully funding state pension plans look to be as bad, if not worse, than expected, particularly as the financial assistance states hoped to get from Congress never materialized.

“Consumer spending is unlikely to quickly return to pre-pandemic levels and states and cities are bracing for the worst of their estimated revenue shortfalls,” according to the report. “This means the pressure on states to underfund their pension plans in the coming fiscal year will likely be particularly intense.”

Equable said the key trend to watch for in 2021 is how state legislatures and governors handle their pension bills, and whether states pay less than the actuarially determined contribution. The firm said it will be important to see whether state legislatures pause previously approved automatic increases in necessary contributions, whether pension boards eschew lowering investment returns to avoid a near-term increase in contribution rates, or if state governments ask their employees to contribute more into pension funds.

“Declining funded ratios do signal a coming increase in contribution rates, which is particularly important right now given the decline in tax revenue,” said the report, which noted that 28 states are anticipating larger gaps in their budgets in 2021 than in 2020, which suggests “that the worst effects of the COVID-19 recession have yet to be fully felt by state governments and public retirement systems.”