As a result of the Senate runoffs in Georgia, Democrats are poised to take control of the US Senate, which would give them a majority in both houses of Congress. This will shift the policy outlook moderately to the left, but majorities are still razor-thin, giving moderates heavy influence. We also envision a potential move toward increased bipartisanship, which may help bring more clarity to policy in 2021.
Georgia on Our Mind
Assuming the Georgia Senate races play out in line with the current vote count, Democrats will soon have control of both chambers of Congress as well as the presidency, at least until mid-term elections in 2022. While there is a material difference between the Senate flipping to Democratic control and Republicans holding the Senate, we don’t believe it’s a radical shift.
The Democrat’s Senate majority will be razor thin, with the Senate split 50–50 and Vice President-elect Kamala Harris casting any tie-breaking vote. That means legislation will need to satisfy the most moderate Democratic Senators, such as West Virginia’s Joe Manchin and Montana’s Jon Tester. If Democrats lose votes from the left wing of their party, they will need to pull in moderate Republicans as well. With such a narrow margin, eliminating the filibuster is basically off the table. On many key legislative issues, Senate Democrats will need to muster 60 votes. The Democratic majority in the US House also narrowed significantly in the 2020 election and currently stands at 222–211 with two vacancies, creating a similar challenge.
Little Things Matter in Policy
Historically, which party occupied the White House or controlled Congress hasn’t had a meaningful impact on broad stock market performance. Policy matters—but larger economic forces are much more influential, and businesses are very good at adapting to different political environments. Having an environment where it’s easier to start or run a business can make a big difference in people’s lives, but the policy impact on markets tends to be more focused.
Markets historically have seemed to prefer divided government, whether because it removes the extremes or it encourages a spirit of compromise. At the same time, market performance when Democrats have held the presidency and controlled both the House and the Senate has been in line with longer-term historical returns. The distribution of power in Washington, DC, by itself does not mean a lot, especially since voters have the chance to change the balance of power every two years.
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IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.
Please read the full Outlook 2021: Powering Forward for additional description and disclosure.