With the results of the 2020 Congressional and Presidential elections finalized, we have heard many questions about how the Democratic sweep might impact the markets in the months and years ahead. It is important to note that it is quite common for the executive and legislative branch to be unified during a U.S. president’s first term in office. In fact, every Democratic president since Woodrow Wilson (1913) served their first year in office with the support of a Democratic House and Senate. The addition of two Democratic senators from the Georgia runoff elections will give both Democrats and Republicans fifty seats, with Vice President-elect Kamala Harris casting the tiebreaking vote.
With only fifty votes in the Senate, the Democrats have no margin for dissention. West Virginia’s Joe Manchin, known as a “Conservative Democrat,” has already said that he will not support many progressive agendas. Other senators from states such as Montana, Arizona, Michigan, and Pennsylvania may feel constrained to vote in alignment with a progressive agenda, given that they hail from fairly red states. As such, we do not think that it is likely for highly progressive measures to pass. The market’s fear of a “blue wave,” which caused a market selloff in both September and October of 2020, was based on polls indicating a much larger blue wave than what actually occurred.
Nevertheless, the election results likely clear the path for more fiscal stimulus to be passed in the near term and for more infrastructure spending and changes to tax policy. While Biden has pledged to roll back some of the Trump tax cuts by raising tax rates for capital gains, high income earners, and corporations, the 50/50 split in the Senate may make this difficult to enact – especially given that the economy still has a long way to go to recover from the COVID-19 recession of 2020.
In terms of financial market impacts, we believe that the following may occur: