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Written by: Jack Manley
"Investors should not overstate the importance of the recent Senate victories, but instead recognize them for what they are: a means to accelerate a near-term recovery in a world still dealing with coronavirus."
In the first week of January, two Democratic challengers defeated Republican incumbents in the state of Georgia’s senatorial race, bringing an end to a hotly contested runoff election and solidifying the Democratic hold of both chambers of Congress and the White House.
However, it would be wise to recognize that this is not the “blue wave” that was predicted in the lead-up to the Presidential election in early November. Democrats lost seats in the House of Representatives, reducing their majority to just 10, and the Senate seats recently won in Georgia have resulted in a 50-50 split, with the narrowest possible majority coming from the Vice President’s role as the tie-breaker. In other words, the “blue wave” that was anticipated has materialized as more of a “blue ripple.”
As a result, investors will likely be wondering what the investment implications of this “blue ripple” are. To do this, it is worth considering what can be accomplished with this composition of government, and what likely cannot. Many of the Biden administration’s most impactful legislative priorities – like sweeping tax reform or a comprehensive clean energy initiative – require a super-majority, rather than a simple majority, of 60 votes. In addition, even those legislative priorities that may require a simple majority could be difficult to enact, given the fairly moderate composition of the Senate and the potential for certain Democratic Senators to vote against their party on more controversial proposals. These two facts mean that compromise will be required in Washington, and bills that do pass will likely be watered down versions of their original forms.
This is not to say, however, that change is impossible under the new regime. Increased regulatory scrutiny on big technology names has emerged as a bipartisan issue in recent years, for example, suggesting that this sector will face policy-related headwinds in the years to come.
More significant, though, is the implication for the fiscal response to the ongoing pandemic – put simply, a Democrat-controlled Senate paves the way for additional stimulus in the months ahead, something sorely needed with existing supplemental unemployment benefits set to expire in March. This additional stimulus, alongside the natural recovery expected throughout the course of 2021, will likely result in a steeper yield curve – this should benefit the financials sector, which was a laggard of 2020, and further complicate the fixed income landscape, where duration may serve as a hedge against volatility now, but could hurt portfolio returns in the not-so-distant future.
All told, investors should not overstate the importance of the recent Senate victories, but instead recognize them for what they are: a means to accelerate the near-term recovery in a world still dealing with COVID. As the landscape continues to evolve, investors would do well to broadly diversify and be nimble in asset allocation, and remember that policy, not politics, is what matters most for portfolio construction.