Based on this morning’s vote count in Georgia, it looks like control of the Senate will flip to the Democrats. While we do not see this as a major change for the trajectory of the economy, it was unexpected and does warrant some analysis. I think the most notable consideration is that while this is a Democratic Senate, it is far from a strong liberal majority. With only 50 seats, Democrats cannot afford a single Senator to break ranks. This will put much more control in the hands of more centrist Democrats, especially Joe Manchin. The power concentration that the moderates wield likely keeps a very aggressive progressive agenda off the table. However, at a minimum, there will likely be some tax reform and a much larger stimulus package.
Stocks are positing a strong rally today, though we would not ascribe too much of the stock market action to the election results. Tech stocks are lagging the broader market, which could be partially due to their sensitivity to tax reform, especially the treatment of overseas profits. Small cap and value stocks are posting very strong gains. Those stocks are more sensitive to economic growth and are probably rallying stimulus hopes. Airline and hotel stocks are also rallying strongly, potentially due to the lack of gridlock in D.C. offering an easier path to a more coordinated coronavirus response. While those points probably explain a bit of today’s action, I would point out that this rotation from growth to value had started to happen prior to the election.
The bond market seems to be reacting to the election much more strongly than the stock market. Treasury yields, the rate of interest paid on U.S. government debt, have notched large increases. The rise in yields is mostly a split between the prospects for stimulus-fueled economic growth and higher inflation expectations. The dollar is a bit higher on the day in response to the jump in rates.
The impact on the stock market from any election in history has been minimal; I still believe the 2020 election cycle will not be any different. On the personal tax side there will be changes and they could be quite impactful to some people. We will be actively monitoring policy proposals and developing tax strategies for our clients. It is very likely that any tax reform passed this year would apply to 2022 taxes. For our clients with large estates and/or very high income, tax strategy will likely be a very important planning issue over the next couple of years. We look forward to working with you to continue to provide plans designed to withstand political and economics storms and wish everyone a happy new year.
–Cormac Murphy, CFA