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US election results

Riding the blue wave

14 January 2021

Blue wave may be a silver lining for markets

The outcome of US Senate runoff in Georgia at the start of 2021 marked a turning point in US politics which could have significant implications for the US economy and global stock markets.

The Democratic party which had not won a Senate race in Georgia in 20 years surprised markets by securing the two seats in the state. In the process, it gave the Democrats control of both chambers in the US Congress and Biden the ability to bring about policy changes.

More fiscal stimulus

One positive outcome of the Democratic blue wave is the possibility of more fiscal stimulus and government spending, which augurs well for the US economy and indirectly the world economy.

The gridlock in the US Congress has affected the ability of the Democrats to push for greater government spending to support the pandemic-riddled economy. With a Democratic clean sweep following the elections in Georgia, decisive fiscal action is now possible, and it will help to accelerate the economic recovery.

Recent weak US employment figures highlight the need for fiscal stimulus. The Republicans had opposed aid for state and local governments, but the Democrats will now be able to pass a package that includes this.

The Senate also refused to vote on a House measure to boost stimulus checks to US$2,000 from US$600 in December last year. That’s could now go ahead as well. More unemployment assistance and health care measures could also be in the cards.

Covid-19 aside, Biden also has plans to increase federal spending significantly in areas like clean energy and infrastructure which should be positive for the US economy in the longer term.

Yet there are fears

On the other hand, the markets had fears about Biden’s economic agenda involving sweeping policy changes - like his plans to raise corporate and personal taxes, increase minimum wages sharply and tighten regulations for the energy, technology, and the financial services sectors.

However, these may not happen anytime soon as they may not be top priority for Biden at this juncture given his focus on reining in Covid-19 and helping the economy to get back on its feet.

Even if Biden tries to push through some of his plans for reforms, he may not succeed given the ideological divide within the Democratic party. Moderate Democrats may join hands with Republicans to reject sweeping changes to policy, especially tax hikes.

Also, the Democrats only have a one-vote majority in the Senate, making any significant changes difficult to execute as 60 votes are required in the 100-seat Senate.

Don’t rock the boat

On the flipside, Biden may also be reluctant to push through any major and controversial reforms which may be perceived as negative for the economy in the next two years, as mid-term elections are due in two years’ time. He may not want to do anything too drastic which could cause the Democratic party to lose its majority in Congress, like it did two years after Obama took office in 2008.

Even if Biden succeeds in raising taxes for some reason, the net effect may still be expansionary and good for the economy if the purpose of the tax hikes is to fund greater government spending. After all, tax revenue appears on just one side of the fiscal ledger. Aggregate spending also matters, especially in a demand deficient economy.

Monetary policy remains supportive

Fiscal policy aside, monetary policy will also benefit with Biden in charge and the Democrats firmly in control of Congress. Unlike the Trump era, the Fed will face no political pressure from the Biden administration. In fact, monetary and fiscal policy may work in greater harmony as Fed Chief Jerome Powell and incoming Treasury Secretary Janet Yellen (Powell’s predecessor) have a long history of working well together.

The fact that the Democrats control over all levers of power following the Senate race in Georgia means that Biden’s nominations for the cabinet and other political appointments are much more likely to win swift confirmation.

More stability on the geopolitical front

The blue wave is also be good news for global political leaders, after a tumultuous four years with Trump at the helm.

Greater political stability under Biden, less global confrontation and a return to multilateralism will be welcome by political leaders worldwide and global investors.

In a nutshell, the economic and political benefits from a more stable political environment in the US, could augur well for global stock markets which may continue to enjoy more upside in 2021. Nevertheless, the road ahead may not be a smooth path. The new normal heralded by Covid-19 means that investors must be prepared for continued volatility and intermittent pullbacks.

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