While President-elect Biden moves ahead with his transition plan to the White House, the January 5th Georgia Senate runoffs remain important for future policy developments.

If Democrats win both races they will control 50 Senate seats and could pass major legislation with a tie-breaking vote from Vice President-elect Harris. If Republicans win at least one seat and control the Senate, the ability of Biden to pass major legislation is much more limited.

If the Democrats win the two Georgia seats, they would be positioned to pass a major coronavirus economic stimulus bill early next year. The Democrat-controlled House of Representatives passed a $2.2 trillion package in October, which suggests the size of the future package. The Democrats would also be positioned to address the longer-term Biden agenda that includes tax increases, more Affordable Care Act subsidies, a major infrastructure bill, and subsidies for green energy.

However, with a narrow House majority and what would be a 50-50 Senate tie, the Biden/Democratic agenda would most likely be less ambitious than Biden has campaigned on. This implies less risk of extreme tax hikes that would impact corporate profits.

If the Republicans preserve their narrow Senate majority, we still think there are some areas for potential agreement. Some items that could be on the agenda are infrastructure, drug price controls, tech regulation reforms, and on-shoring legislation (bringing manufacturing back to U.S.). Many of these issues have bipartisan support. The Republican controlled Senate recently passed a $500 billion coronavirus package so sizeable stimulus should still be enacted in the coming months.

Using Executive orders, Trump was able to significantly reduce regulation without Congressional approval. Biden could reverse many Trump policies using the same. We expect trade tensions to be reduced under a Biden presidency, regardless of who controls the Senate. This should benefit multinational corporations. Please see our special report, Presidential Candidate Investment Implications, for additional detail on Biden’s proposed policies.

Meanwhile, we remain confident in the economic recovery despite rising virus cases. Friday’s labor market report showed unemployment fell to 6.9% (it has declined nearly 8% since the lockdown highs of the spring) while private nonfarm payrolls increased a broad-based 906,000. These better-than-expected numbers show the labor market continues to heal, despite the lack of a follow-on stimulus package.

We also received the October business surveys last week. The ISM manufacturing Index shot up to its highest level since September 2018 as factory activity gained significant momentum. The report noted that five of the six largest industries posted strong growth. The ISM Non-Manufacturing Index showed services activity grew for the fifth consecutive month albeit at a slower pace—this comes amid a resurgence of COVID-19 cases nationwide that is weighing on certain service sectors.

Corporate earnings are also coming in better than expected. With about 87% of the S&P 500's market capitalization having reported third-quarter results, earnings have surpassed estimates by +19.2% in aggregate, with 84% of companies beating their projections. We expect the positive economic momentum to support profit growth in the fourth quarter and in 2021.

In summary, we remain optimistic on the direction of the economy and risk assets, regardless of who ultimately controls the Senate. We are also encouraged by the progress being made toward a vaccine for the virus that will ultimately allow for normal economic activity and recommend investors stay the course with their long-term investment plan.

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