With Democrats taking control of the US Senate, there would be significant changes to policy expectations. The implications of this for various asset classes include a weakening US dollar, lower margin prospects for US equity sectors with greater tax exposure and those with lesser exposure to public spending as well as potential upsides for Europe and emerging markets.
Six days into 2021 and market consensus is already broken. There should be no illusion that this is a major macro event that challenges several policy assumptions underpinning the current economic and market outlook. Above all, US fiscal policy should be looser than expected, US corporate and personal tax rates are likely to rise and domestic regulatory tightening should be stronger over the next two years.
This policy mix implies a steeper yield curve with long-term rates rising faster, a weaker US dollar beyond current expectations and US equity returns narrowing compared with ex-US markets. Regarding the longer-term political implications for Georgia and the United States (US), the runoff election restated the demographic shift occurring in urban and suburban areas of the South (Figure 1).
Politics Still Matter in 2021
The Georgia run-off results are noteworthy given that Joe Biden won the state just very narrowly with a record-high turnout. Historically, Republicans have outperformed their results in runoffs versus the general election, even if this gap was declining in recent years (Figure 2).
The failure to win either of the Senate seats reflects long-term demographic shifts, where Georgia is clearly following other swing states in favor of the Democrats, driven by an increase in the voting numbers of college-educated whites who populate the suburban belts in metro areas. Figure 1 illustrates this demographic change with Colorado and Virginia simply being further along this path than Georgia or even Texas. Mr. Biden won the former two states with double-digit margins in 2020, while narrowly winning Georgia and losing Texas by 5.6%. But the net swing toward Democrats is incredibly similar in all these states.
This trend matters over the long term. However, for the upcoming electoral cycle, the Republicans remain the favorites to retake control of the House in 2022, based on 2020 redistricting and anti-incumbency sentiment at midterms. Senate control is also a possibility as one of the Georgia seats will face another election in two years.
More importantly though, the current Democratic control of the Senate carries significant changes in policy expectations. First, it changes the intra-Democratic equilibrium by moving the party leftward as certain policy proposals could now come into fruition and more progressive nominees can expect Senate confirmation. Second, it also means that large parts of the Biden policy platform are likely to be enacted, in a reduced version of the Blue Wave scenario anticipated in November.
Taken together, the biggest macro implication is that there will be prolonged fiscal support and a smoother path toward fiscal tightening. The Democrats have learned the lesson that they reap no electoral rewards for fiscal conservatism and thus will maximize their two-year window for boosting public spending in priority areas. This would include continued fiscal support for the COVID-19 battered parts of the economy as well as infrastructure spending not only to promote the immediate recovery but also lift potential growth rates in the future. The last US infrastructure program in 2009-2011 was led by Mr. Biden and Senate control makes another infrastructure push a near certainty.
While the spending plans will be widely welcomed, the revenue plans are controversial. Tax increases are likely, particularly in the form of higher corporate and personal income tax rates as well as capital gains taxes for high earners. Regulatory tightening could also be more pronounced if more progressive nominees were to get Senate confirmation. However, the legislative corollary to regulatory changes will still be limited given that the reconciliation route is harder to apply to non-fiscal legislations.
The yield curve moved only moderately in the two months since the election, but more rapid steepening can now be expected. The post-vaccine recovery will take hold in earnest over the course of 2021 and more expansive fiscal plans could further lift long-term rates even if there is less movement on the short end of the curve. Greater fiscal deficits along with easy monetary policy are likely to accentuate the weakening of US dollar. This will be partially driven by the relative return assumptions on US risk assets.
US equity sectors with greater tax exposure (those which benefited the most from the Trump tax cuts) and those less exposed to public spending may face lower margins. Another reason for capital to re-allocate to non-US equity markets is that the latter’s growth should recover nicely with the availability of cheaper vaccines. Europe and emerging markets should enjoy the upside of lower policy volatility on trade and the spillover from higher US fiscal spending.
The Associated Press hadn’t formally called the Jon Ossoff-David Perdue election at the time of writing this article. Mr. Ossoff was leading by 16,370 votes as of 9.00 am Georgia time.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of Elliot Hentov through 06/01/2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.
There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For EMEA Distribution: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies. SPDR ETFs may not be available or suitable for you.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further, there is no guarantee an ETF will achieve its investment objective.
SHARES IN THE FUNDS OF THE SPDR® ETF SICAV, SSGA SPDR ETFS EUROPE I AND SSGA SPDR ETFS EUROPE II PLC MAY NOT BE AVAILABLE FOR OR SUITABLE FOR YOU. THE VIEWS EXPRESSED IN THIS SITE DO NOT CONSTITUTE INVESTMENT ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. Further information and the prospectus/KIID describing the characteristics, costs and risks of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website and from your local SSGA office.