Image by Clay Banks

The Senate Race as the Key to election

impact on U.S. Markets

November 2020

Introduction 

Investors around the world were closely following the U.S. Presidential election earlier this month to gauge a measure of where equity markets would head in the future. The race for the U.S. Senate, however, could turn out to be the decisive factor in determining which business sectors investors should focus on to find lucrative investment opportunities. The controlling party of the Senate will ultimately be decided on Jan. 5 as races for both seats in Georgia have been forced into runoff elections.

Senate Race 1.png

Source: The New York Times

In case Democrats secure both seats in Georgia, the party will eventually take control of the Senate as the tie-braking vote would be cast by Vice President-elect Kamala Harris.

 

A Republican Senate might be ideal for the market

Even though the Republican party has filed multiple lawsuits in several jurisdictions, Joe Biden is predicted to hold his leading position and move into the White House in January next year. If the Republican party secures power in the Senate by coming out ahead in Georgia, investors would have to deal with a split government for the next 4 years, which could turn out to be a blessing for market performance.

As we can observe from the data in the below table, there is virtually nothing between the market returns during split governments and unified governments since 1929.

Screenshot 2020-12-03 at 12.30.36.png

Source: The Wall Street Journal

This time around, however, the prospects for market performance looks better under a divided government because of the significant disparities between the two parties when it comes to policy decisions. For instance, corporate taxes are expected to head higher under a Biden administration, which is not welcome news for investors. However, if Republicans keep control of the Senate, an amendment to the Tax Cuts and Jobs Act of 2017 is unlikely to be approved, and corporate America will continue to reap the benefits of lower taxes.

The pharmaceutical sector might also come under severe pressure if Democrats go ahead with their proposed aggressive cost-cutting plans for drugs. However, this would not be possible without the support of the Senate, and a divided government could turn out to be a tailwind for health care stocks.

The oil industry, however, might come under pressure regardless of who wins the Senate as the President would be in a position to punish the crude oil industry in favor of renewable energy sources, and Joe Biden has confirmed on several instances that he would promote the use of renewable energy sources in a bid to achieve sustainable development goals.

 

A Republican Senate will act as a check on the power of the government, which is a positive development for capital markets.

The decision on the expected economic stimulus package hinges on Senate power

Economic stimulus packages introduced by the U.S. government played a massive role in the recovery of stock markets since March 23, and investors are eagerly waiting for another round of stimulus as it would pop stock prices higher. The Senate and the House have unanimously agreed to rollout another stimulus package, but the two parties have found it difficult to reach a middle ground regarding the cost of the package. Democrats who currently hold the power in the House have been pushing for a $2.2 trillion package for quite some time, whereas Republicans who control the Senate are proposing a $1.8 trillion package to keep costs low.

If the Republican party keeps the power of the Senate in January, the debates would continue to go on and the stimulus package is likely to be delayed. On the other hand, if Democrats secure the power in the Senate, a stimulus package running into multi-trillion dollars is likely to be introduced as early as January.

 

Takeaway

The party that secures the power in the Senate will have immense control over policy decisions, and a Republican win will turn out to be helpful to restore a balance in power. While this is good news for investors, a split government would mean a delay to the next stimulus package. The race for the U.S. Senate, in any case, is key to determining which business sectors should be overweight in an investment portfolio.

 

 

 

About the author(s)

 

Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.