After winning both seats in the Georgia Senate run-off elections, the US Democratic Party achieved its ‘blue wave’ gaining control of both the White House and Congress, but what impact will this have on the market and investors?
The gaining of two seats and parity in the Senate has now given the Democrats overall control of Congress, given incoming vice president Kamala Harris’s casting vote in the Senate, having a majority in the House of Representatives.
This means that the Democrats will have control of both the White House and Congress, creating the so-called ‘blue wave’ market commentators had written off in the immediate aftermath of the presidential election.
Prior to the presidential election the idea of a ‘blue wave’ was a concern for some areas of the market, as it would allow president-elect Joe Biden to pass more of his ambitious tax, infrastructure and fiscal support policies.
Richard Hunter, head of markets for interactive investor, said that sentiment had been generally positive on an outcomes which is “something of a double-edge sword”.
He explained: “On the one hand, the new balance of power is largely expected to result in increased fiscal stimulus and infrastructure spending, but it may also be accompanied by higher taxes and regulation.”
Schroders’ chief economist Keith Wade said that the biggest impact near-term will be an increase on fiscal spending.
The Democrats have been petitioning for a stronger Covid-19 fiscal response for some time, with the Covid-19 crisis becoming Biden’s immediate priority once in office.
Indeed, Biden has already called the latest $900bn package a “down payment”, according to Wade.
He said: “Expect an enhanced bill with the stimulus cheques most Americans are set to receive increasing from $600 to $2,000, an extension of higher unemployment benefits (from March to June) and increased spending on state and local government.
“This could add up to another $900bn to the fiscal boost”
He added that Schroders’ previous baseline case was for a split Congress. But with the Democratic sweep they’ll now be “increasing our economic growth forecasts for this year and next”.
Wade continued: “There is still a difficult winter to get through with Covid-19 cases soaring and we would have to see the details of the fiscal stimulus.
“But normal multipliers would suggest adding 1 percentage point to US GDP this year and next. This would take our forecasts to 4.8 per cent and 4.5 per cent for 2021 and 2022 respectively (up from 3.8 per cent and 3.5 per cent).”
He added: “Such growth would reduce unemployment and close the output gap faster, which in turn would mean greater inflationary pressure.
“Consequently, we would be looking for an earlier rise in the Fed’s target interest rate, potentially in 2023 rather than 2024.”
Looking further out and the main impacts will come from Biden’s more ‘contentious’ policies likely being passed through Congress: namely his promised corporate tax increases and tech regulation as well as an aggressive green infrastructure plan.
In his presidential campaign ,Biden openly declared his intent to pass policies increasing corporate tax to 28 per cent and regulation which could ‘break-up’ the big tech names.
Corporate tax was a major concern for the incoming president since technology stocks had significantly benefited from incumbent president Donald Trump’s 14 per cent tax cut in 2017.
Indeed, in reaction to the Georgia elections technology stocks fell.
Performance of S&P 500 Information Technology index performance YTD
Source: FE Analytics
But Ed Smith, Rathbone’s head of asset allocation research, said although Biden had pledged to increase corporate tax “on day one” in September, he thinks this may be delayed by the Covid-19 recovery.
Another area the ‘blue wave’ is expected to impact is infrastructure, with Biden having run on campaign promises to invest heavily in US infrastructure, with a focus on green projects especially.
Rathbone’s Smith said: “Biden has pledged to oversee $2trn of spending on clean energy and infrastructure over the course of his first term.
“Biden’s green infrastructure push, which could also be enabled by a Democratic clean sweep, is designed to bring the US to net zero emissions by 2050, and by 2035 in the electricity sector.
“Designed correctly, such a bold target could boost the economy.
However, Smith said while markets may be volatile as investors worry about the potential implications of the Democrats’ re-distributional platform, it will likely be tempered by moderates.
“The razor-thin margins in Congress give moderate Democrats the upper hand,” he explained. “That alongside the constraints of more Covid disruption this winter could waylay the policies investors fear most.
“We think there are good reasons to believe that president-elect Biden’s ‘tax and spend’ policies – which unified Democratic control could enable – would boost US GDP.
“Companies in general may find they have a smaller slice of the pie, but the effects could be worse for some sectors than others. This is something we’ll be watching closely.”