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Georgia Senate Runoffs and the Financial Markets

The January 5th runoff in Georgia for two Senate seats will help decide which party controls the Senate. The result of the runoffs may come on Wednesday morning or Thursday. The outcome can influence the performances of equities, fixed income, commodity, currency markets, and influence various policy agendas. The January 5th senate races will lead to the following: Democrat in the White House, and either a Democratic House and Republican Senate, or a Democratic House and Democratic Senate.


The Republicans currently maintain a slight majority in the Senate. If just one Georgia Republican senator wins, then-President-elect Joe Biden will face a difficult time following through with his policy initiatives and agendas. The Financial markets view this as a status quo. A gridlocked Congress would prevent legislative overhauls such as a high corporate tax, fewer regulations, less chance for the approval of higher fiscal stimulus programs, lessen healthcare reform, etc.


However, if the Democrats win both Senate seats, this creates a 50-50 split in the Senate, leaving Vice President-elect Kamala Harris, a Democrat, with the tie-breaking vote giving the Democrats control of the chamber. Under this scenario, President Biden will have a better chance to implement his initiatives and agendas. Some believe this will be like when Trump's and the Republicans controlled both the Senate and the White House during his first two years of Presidency. A Democratic majority in the Senate, House, and White House may lead to more fiscal spending, higher interest rates, rising inflation, weaker US Dollar, harsher regulations, alternative energy push, etc.


The latest polling data gives a slight edge to both Democratic candidates in their respective races. However, some believe that even if both Democrats prevail in the runoffs, the Democratic party will hold only a slim Senate lead. The margin may prevent President Biden from implementing wholesale legislative changes. Some also embrace the clarity of the political landscape - both in the US and internationally.


In summary, the following are areas that may be impacted by the results of the Tuesday' election:


Financial Sector (Banks) – If Democrats prevail, restrictive regulations, rules, and higher corporate taxes may hurt this sector. On the other hand, more fiscal spending under a Democratic-controlled Congress is beneficial for some bank stocks. The interpretation is a wash or a neutral call.


Alternative Energy Stocks – A Democratic sweep can lead to Biden's plan to create green and clean energy alternatives. Alternative energy stands to benefit the most such as solar, wind, EV, environmental, social, and governance (ESG), etc.


Energy Sector (Oil and Gas) – A Democratic-controlled Congress would lead to harsher rules and regulations implemented within the Energy Sector.


Healthcare - Implementation of another Healthcare reform program from the Democrats would weigh on the Healthcare industry leading to dramatic changes such as insurance coverage and lower medical costs. Healthcare industries such as Healthcare Insurers and Pharmaceuticals stand to feel the brunt of this reform.


Big Tech – If Democrats implement anti-trust rules and regulations then it may pressure FAANG plus MSFT. However, the continuation of the work-from-home theme and the structural growth story can lead to the resumption of the secular bull trend in Technology.


Infrastructure – An infrastructure spending package by the Democratic lead Congress and President will help a broad range of industrial, materials, and construction stocks.

US Dollar – Higher fiscal spending programs from the Democrats can weaken the US Dollar further. A declining US Dollar tends to help US multi-national companies, Emerging Markets, and international equities, at least from a relative basis.


Commodities – Massive fiscal stimulus by the Democrats, a weaker US Dollar, and easy FED monetary programs can lead to rising inflation favoring inflation-sensitive Commodities, specifically precious metals (Gold, Silver, and Platinum).


US Fixed Income – Higher fiscal stimulus programs coupled with economic growth can lead to higher inflation. Higher inflation will result in US treasury yields trending higher, over time.


Value versus Growth – Democratic Presidents and Democratic-controlled Congress prefer government spending over tax cuts, especially for the wealthy, to boost the US economy. They are less concerned about balancing the budget and deficit financing as Republican lead Presidents and Republican-controlled Congress. Value and Growth Stocks tend to perform better under Democratic sweeps.


In conclusion, the control of the Senate depends on the January 5th runoff. The possible outcome is either a Democratic President and a Democratic-controlled Senate and House or a Democratic President and a split Congress.


Although it may be difficult for the Democrats to sweep if this scenario occurs, look for leadership changes within various sectors, stocks, and financial assets. Nonetheless, history has shown that under a Democratic-controlled White House and Congress, the US stock market, in general, tends to perform better. The performance may be even more optimistic under a dividend Congress such as a Democratic President, Democratic-controlled Congress, and a Republican-controlled Senate.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


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