With Democrats Raphael Warnock and Jon Ossoff winning the Georgia Senate runoff races, the Democrats will now hold 50 seats in the 100-person Senate chamber, while Vice President-elect Kamala Harris is in position to break Senate ties.

This outcome gives Democrats control of the White House and both chambers of Congress for the first time since the party lost the 2010 midterms during President Barack Obama’s first term. We have the following investment observations on the outcome.

  1. While the Democrats control both the White House and Congress, it is by a thin margin. This implies that they will have to make compromises on their platform that they wouldn’t have to if they had a large majority. The size of future pandemic stimulus, green infrastructure spending, and tax increases will all most likely be smaller than Biden’s campaign proposals due to the need for compromises.

  2. Biden and the Democrats will initially focus on economic recovery from the pandemic and control of the Senate will allow for additional fiscal spending. This should further enhance the economic recovery that was set to benefit from the recently passed $900 billion stimulus plan. Cyclical economic sectors benefit from stronger economic growth, including Industrials, Materials, Energy, Financials, and Consumer Discretionary. Many of these stocks rallied as the results unfolded yesterday.

  3. An infrastructure bill was one of the few legislative options for the Biden administration under gridlock, now it is even more likely. Infrastructure is popular and both presidential candidates touted their plans ahead of the November election. Moreover, what Biden cannot achieve directly under climate policy, he may be able to address under infrastructure. While major infrastructure spending benefits traditional construction and material stocks, technology stocks that are building advanced communication systems would also benefit.

  4. Alternative energy will benefit under Democratic control from increased subsidies for green energy (wind, solar, and electric vehicles) and infrastructure spending directed toward alternatives.

  5. Biden’s plan calls for raising the corporate tax rate to 28% from Trump’s signature reduction to 21%, increasing minimum taxes on low-tax multinationals and increasing taxes on investment income. Control of the Senate makes these higher tax plans more likely, though thin majorities in Congress makes compromise likely. The Technology sector has the most at risk for potential tax changes on foreign profits.

  6. A Democratic priority is shoring up Obamacare and the health care exchanges, which is a positive for the Health Care sector, especially hospitals and insurers. However, both parties were in favor of drug price controls, which is more likely underli Democratic control. This is a risk for the pharmaceutical and biotechnology industries.

  7. Defense should grow more slowly under Democrats after Trump significantly increased defense spending.

  8. Trade tensions should be lowered under Biden, which will benefit U.S. multinationals. Retailers and consumers would benefit from any reductions in Chinese tariffs.

  9. The chances of U.S. state and local governments receiving fiscal support—previously denied by the Republican Senate—have increased, which would benefit municipal bonds.

  10. Trump significantly reduced regulation primarily through Executive Orders, which didn’t need Congressional approval. Biden’s plan calls for increased regulation. Technology, Financials, and small companies (with limited resources) were all big beneficiaries of Trump’s tax and regulatory environment that would be most impacted by the potential reversal of these policies.

Please see our previous publications for additional detail and background on the election and Biden’s proposals.

Meanwhile, we remain optimistic on the outlook for the economy and risk assets, and continue emphasizing the importance of sticking to long-term investment goals and maintaining a well-diversified portfolio that includes exposure to bonds, in addition to stocks and other risk assets.

Disclaimer
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