13 Jan 2020 Elections

Democrats Gain Control of Presidency and Congress

The November elections put the Democrats in control of the presidency with Joe Biden being elected the 46th president of the United States.  In addition, the Democrats maintained control of the House of Representatives though with a diminished majority.  Following the run-off elections in Georgia the Democrats also gained control of the Senate due to vice president-elect Harris breaking the 50-50 tie once assuming office.  Given this composition of the Federal government, the incoming Biden administration will likely be able to implement the less controversial portions of its agenda, especially in areas where this can be done by executive order.  The tightness of Democratic legislative majorities make some of the more ambitious progressive goals of the party’s left much less likely to be implemented.

Expectation for Reflation

Since the November election the equity market is up almost 15%, oil is up sharply, the dollar is down over 4% relative to the Euro, TIPS breakevens are up 36 bps, the 10-year yield is up 27 bps and the 2-10 spread is up 29 bps.  Almost all of these moves extended following the Georgia run-off elections.  These moves point to an expectation for stronger growth, higher interest rates and higher inflation due to greater fiscal stimulus.

What Now?

Significant fiscal stimulus is very likely given the final outcome of the 2020 election cycle and the slowing recovery in macroeconomic data as the pandemic surges ahead of widespread global vaccination.  While this will almost certainly produce a short-term surge in growth, it is unclear how long this will last or if it will become self-sustaining.  The current political alignment in Washington is also likely to increase regulation of many businesses and to either increase the tax burden or shift it to fall more onto a narrower tax base.  These policy shifts would be headwinds to resumed growth and a recovery to longer-term growth trends.

The recent market moves reflect a belief that the narrow Democratic majorities in congress will prevent the more progressive wing of the party from being able to implement policy items such as the Green New Deal, Medicare for All, student loan forgiveness, a Universal Basic Income, a wealth tax or a $15/hour nationwide minimum wage.  If the progressive wing of the Democratic party is able to prevail on these issues, growth expectations reflected in the capital markets are likely to come down significantly. 

Over a longer time horizon, a Biden administration and Democrat-controlled congress are unlikely to address the unsustainable U.S. fiscal trajectory.