The early morning hours of January 6th brought with it the news that the first of two U.S. Senate races in a special Georgia runoff election would be called in favor of the Democratic candidate, Raphael Warnock. Although the second race between Republican incumbent David Perdue and Democratic challenger Jon Ossoff is still too close to call, Warnock’s victory and Ossoff’s slim lead are both bringing to the forefront the likelihood of a Democratic sweep and full control of policymaking in the U.S.
Even prior to the polls closing in Georgia Tuesday night markets began pricing in the likelihood of Democratic control. The 10-year U.S. Treasury yield peaked above 1% for the first time since March, inflation expectations rose above 2% for the first time since November 2018, and futures on the tech-heavy NASDAQ index sank.
So, what does a Democratic sweep mean for my portfolio?
It is Exeter’s view that a Democratic sweep will indeed open the gates for more fiscal stimulus in the first half of 2021 to combat the still continually active COVID virus. Many investors concerned about significant tax hikes can likely sleep easy for a little while. Efforts to combat the virus and stimulate the economy will likely be the immediate focus of the new Administration. In addition, and as outlined in President-elect Biden’s campaign policy, a significant infrastructure bill that would favor housing, transportation, and construction sectors is a top priority as well. Favorable renewable energy policies will certainly be a priority in the first year or two. Antitrust reviews for big tech firms will also be a potential risk but should not be a cause for alarm at this point. Small-cap stocks and other cyclical industries are also seen to be benefactors of a Democratic sweep.
Historically speaking, financial markets do not really care which party is in control of the government (see chart below). The market likes certainty, one way or another. Expect some short-term volatility early in 2021 but as the world is vaccinated and allowed to reopen, and a President that is seemingly more predictable than his predecessor steps into office, uncertainty in markets should begin to taper off.