After spending what is estimated to be around 11billion dollars[1] the US Presidential and Congressional elections are finally ending. The Democratic candidate, Joe Biden, will be the 46th President of the US. In Congress (the legislative branch), the House of Representatives (House) comfortably remained with the Democrats and while the Senate had appeared likely to remain with the Republicans who were expected to win at least one of two Georgia seats, both seats went to the Democrats in one of the most expensive Senate Races ever[2]. This now means the race for the Senate finishes in a tie with each party picking up 50 seats. However, since the Vice President decides tied Senate votes this will see the Democrats have effective control of both houses and the presidency. However, neither chamber showed signs of the so-called “Blue Wave” anticipated by pollsters before the election. So, why does this matter so much to markets and why do they appear calm about this outcome?
A most fragile Democratic congress means that fewer laws can still expect to be passed, meaning less uncertainty
Firstly, all that is required for a bill to fail is for one or more senators to cross party lines. Issues are not always cut and dry. For instance, recent legislation surrounding infrastructure spending has failed because for some party members it would represent too much government spending, while for others it is not enough. However, this composition of Congress will allow President-Elect Biden to assemble his administration with approval through Congress likely to be along party lines for all but the most controversial of choices. As any new laws generally require both the House and the Senate to approve bills before the President signs them. The President can refuse to sign a bill, which is a veto, in which case both the Senate and the House will need to approve the bill by a two-thirds majority to overrule the President’s reluctance. But if Congress is split along party lines then the moderates in the middle who can create consensus will be those who receive the most attention. It is also worth noting that in the current pandemic, assembling all members of Congress for every vote is not always possible.
As highlighted in our Quick Guide to the 2020 US Election, stock markets would have taken a split Congress more favourably primarily because it means less risk of an increase in regulation or higher taxes. But this make-up is still likely to see very moderate policy changes.
Less regulation is better for “Big-Tech”, Healthcare, and Financial Services
This slim majority only marginally increases the likelihood that Congress will be able to agree how to alter laws. So some hurdles still remain to get the necessary changes over the line to enable long-discussed (at least by politicians) action against so-called Big Tech via antitrust laws. These laws protect consumers by regulating companies with significant market share/control and it’s likely we’ll see a move to strengthen existing laws. But as perverse as it may sound, this legislative gridlock is actually positive for investors. It is also important to note that while President Trump has been combative with China over Trade, once Biden becomes the next President, the rhetoric might become a bit more moderate, but the Democrat candidate has stated he wants to work to coordinate a global effort to engage Beijing. A more co-ordinated global approach may result in a more favourable, timely and settled outcome for China’s trading partners, including the US, which would be positive for business.
More infrastructure spending if parties can agree how to pay for it
Similarly, while both parties support greater infrastructure spending, they do not agree on how to pay for it. The Democrats would prefer to raise taxes or increase borrowing to boost infrastructure spending, whereas Republicans have advocating using tax incentives to spur private investment in public works. A lower level of fiscal spending, will also increase the burden on the Federal Reserve (the US equivalent of the Bank of England), which may require an increase in the current Quantitative Easing plan to help support growth – this means the Federal Reserve may need to buy more financial assets, such as government bonds, to lower interest rates and increase the money supply to support the economy. The engagement of the moderates of Congress here will be key in deciding the outcomes of these important policy decisions and, in turn, the downstream impact on markets.
Covid remains key to the recovery
Global growth remains dominated by Covid-19 and the knock-on impact of economic implications of restrictions. While mortality rates at present are lower than during the first three months of 2020 (first quarter or Q1), the level of infections and hospitalisations are once again high. This rise is far more marked in Europe where cases are now exceeding those seen earlier in the year but also because the US saw much less of a decline in cases over the summer. However, this may see an elongated Covid-19 experience for the US but with higher economic performance. Whereas Europe can expect to see a further economic hit from the resumption of lockdown measures. At present the main driver that would lift markets is a vaccine coming earlier than expected in 2021, with the converse being the key risk.
References:
[1] https://theconversation.com/the-scale-of-us-election-spending-explained-in-five-graphs-130651
[2] https://www.theatlantic.com/politics/archive/2021/01/money-spent-georgia-senate-runoffs/617545/
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
