2021 is off to a crazy start as the U.S. Capitol was today stormed by rioters protesting the election of Joe Biden.
As bizarre as it is to write that sentence, it can’t be considered a surprise as Donald Trump has continued to fan the flames of unrest as his claims about the election being fraudulently stolen from him persist. Echoing scenes from many banana republics, the U.S. Capitol was breached today for the first time since 1814, when the British attacked it and set it on fire during the war of 1812. But despite the drama of what is unfolding, nothing that has happened today will change the outcome of the election or have any impact on markets (outside of a small wobble in late trading).
The big news of 2021 was the result of the two Georgia special elections which saw the two Democrat challengers win against expectations. The end result is that the Democrats will control the Senate (as well as Presidency and House of Representatives) which is great news for Joe Biden’s agenda. And, with the market loving the status quo, the ASX 200 was hit hard yesterday on the expectation of a sell-off in the U.S. But our view at Rivkin is that a 50-50 split in the Senate (with Vice President Kamala Harris deciding tied votes) is the best outcome for markets. We can now expect an expanded stimulus bill in late January/early February whereas GOP Senators were already beginning to resume their fiscal conservatism stances they have been typically known for. A big infrastructure bill is also on the cards and will be a big win for the economy and stock market.
The more divisive agenda items, however, are likely to face opposition from the more conservative members of the party. In particular, West Virginia’s Joe Manchin looks to be a kingmaker for the Biden agenda, but he represents a constituency deep in coal country and is unlikely to support the more progressive plans of the new administration. There could be some hiccups in the tech sector with increased regulation likely but enforced breakups of the tech giants might be a bridge too far with such a narrow majority. Additionally, the Trump corporate tax cuts will likely be repealed but most economists have argued against ‘trickle-down economics’ and that most businesses, faced with lower taxes will not invest and we have seen that borne out with stock buybacks. At least in recent history, both the economy and stock market have fared better under Democrat administrations so a reallocation of those tax cuts may ultimately have a more meaningful impact spent on infrastructure etc.
These views have been borne out overnight (at least for one day) with a rally on the S&P 500 and Dow Jones Industrial Average (and a small sell-off on the Nasdaq) so we should see a relief rally today. And, given the dynamics of the new government, our view is that continued strength in 2021 is likely.
