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The impact of US Senate Control

05012020

Today marks the US Senate runoff elections in Georgia. While the US Presidential election last November resulted in a Biden Victory, the senate majority is still to be determined. Today’s Georgia senate run offs will determine which party gains control of the senate and more importantly, will also set the US policy outlook.

In the US November election none of the candidates in Georgia won a majority, which is determined by at least 50 per cent of the vote. As a result, a runoff election is needed to determine who will win the two remaining seats. As things stand, if the two seats are won by the Democratic candidates, a 50/50 split will result, with vice-president Kamala Harris holding the tie-breaking vote. Under this circumstance the current Republican Senate majority will pass on to the Democrats, producing a “blue wave” US Election outcome. If, on the other hand, the Republicans win one of the seats, the Republicans will hold on to the Senate.

The outcome of the Senate majority will shape Biden’s Presidency, and his ability to implement his policies into action. The impact of the two Senate elections in Georgia is significant when one considers the key policy differences between a Republican and Democratic Senate. Particularly relevant for financial markets are the policy differences on fiscal stimulus and tax outlook.

Under a “blue wave” scenario, with a Democratic win of both the Presidency and Senate, the amount of government spending to support the economy is expected to be higher. A clear example of the more sustained stimulus approach proposed by the Democrats was evident over the past few days, when Senate Democrats pushed for a vote to increase the stimulus cheques from $600 to $2,000. The obstacles of a divided government were visible to all when the Democrats failed to even get a vote on the higher cheque payments due to an objection from a Republican Senator.

The other key focus of Biden’s policies which are relevant to financial markets is the increased tax and regulatory risk. Needless to say, the proposed tax hikes would be a risk to corporate earnings, while regulatory headwinds for technology companies could lower the growth outlook for “Big Tech” companies. The key issue, however, is the balance between the fiscal and tax outlook and how the focus will shift between the two.

Against the current economic struggles presented by the pandemic, the positive impact of further fiscal support on the macroeconomic outlook is expected to outweigh the impact of tax hikes. Moreover, even with a Senate win, the narrow majority also lowers the probability of managing to push the tax proposals into law when compared to the pre-election possibility of a stronger Democratic majority across the House and Senate.

Economic and tax policies aside, the democrats are also seeking to push sweeping reform on the energy front, with a key focus on renewable energy and climate change. Moreover, the democratic administration is expected to approach the US-China relations in a more diplomatic approach, and therefore elevating trade risk premiums.

As a result, a “blue wave” outcome of today’s Senate elections is likely to push equities, yields and inflation expectations higher, as investors price in a higher prospect of fiscal stimulus and therefore, a faster pace of economic growth. On the other hand, if the Republicans continue to hold on to the Senate’s majority, Biden’s presidency will be characterised by a divided government. In this case, the Senate’s majority, albeit slim will be just enough to be able to block President Biden’s goals and the Democrats will struggle to pass the economic, tax, health care and climate policies as promised.

Disclaimer:

This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/ The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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