The Democrat ‘blue wave’ and its market implications
Now that the Democrats have control of the Senate, what can markets expect.
As a result of the Georgia elections overnight, the US Senate is now split 50-50 between Democrats and Republicans. The vice-president will have the casting vote, which means the Democrats are now in charge of the presidency, senate and House of Representatives for the first time since Barack Obama’s win in 2009.
This does give the Biden administration the chance to push forward with its policies, for example a broader fiscal stimulus programme that could see the ‘$2000 cheque plan’ return. Also suggested are potential corporate tax increases and a greater regulation of big tech names like Meta Platforms Inc (24 Hours). But 50-50 is not a licence to do as you please, and the White House will still need to keep all its senators in line in order to pass legislation. Some will find the idea of corporate tax cuts unappealing, and others may vote against attempts to clip the wings of Zuckerberg, Bezos and others.
Thus, an untrammelled Democratic administration is still not likely. Biden will have to tread carefully to avoid wasting political capital on schemes that are likely to fail. But some programmes will be passed, and the declines in the dollar point towards an expectation of greater fiscal spending to help support the US economy. Along with this, we have seen a rise in bond yields, although this only puts a small dent in the downward move since January 2020:
Higher yields will mean that the high-growth tech stocks that have been such winners in 2020 will become less attractive, but not entirely unappealing. For investors used to just buying every small dip in the Nasdaq, this might come as a surprise, as other indices such as the US Russell 2000 that do not have these big tech names, begin to outpace the Nasdaq in terms of relative performance. It will not be just the Nasdaq that suffers. The S&P 500 is now an index of big tech, and then everyone else, as the pie chart below shows:
This weighting was a tailwind in the summer of 2020, driving the index higher and higher, but now it threatens to become a ball and chain – even if tech stocks don’t actually fall, they could become less attractive on a relative basis to bonds and to those stocks such as industrial names and consumer cyclicals that will benefit from a resurgent US economy. Clearly, they are not about to lose all their attractions, but the time has perhaps come to consider sectors other than just technology when looking at ways to play the ongoing bull market.
Even with the Fed keeping rates near zero, a world of a steepening yield curve could benefit sectors such as financial services (as banks charge higher rates for loans), real estate (as consumers see their incomes recover), consumer cyclicals such as appliances, cars and entertainment, and basic materials such as miners. As the new administration takes over, it will be important to watch for which sectors show strength and which lag behind, a reminder that it is not just a stock market, but also a market of stocks.
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