The US Democrats’ surprising victory in the Senate run-off elections set off a wave of political chaos in Washington, but is broadly positive news for financial markets, global asset managers have said.
Commenting on the results of the elections in the US state of Georgia on Wednesday, Janus Henderson Investors head of multi-asset Paul O'Connor said the Democrats’ wins would “give them a solid platform for implementing their legislative program”.
“Financial markets will likely focus on the prospects of more fiscal stimulus in the US in the short term, and higher taxes later on,” Mr O'Connor said.
“Beyond fiscal policy, investor attention will now shift towards other areas of the Democrat policy agenda such as infrastructure spending, minimum wage increases and greater regulatory intervention across key industries.”
Mr O'Connor added that investors were “dusting off the blue wave playbook” in preparation for a more socially progressive agenda from President-elect Joe Biden now that the Democrats had control of both houses of government, but that the party’s minority control of the Senate would still only give the President limited power.
“Given that implementing legislation in many of the areas will still require 60 votes to pass in the Senate, it seems right to expect a ‘light blue’ version of the Democrat policy program, rather than the most radical version,” he said.
JP Morgan Asset Management global market strategist Kerry Craig said the election outcome would lock in further fiscal stimulus in the US, which would ultimately be supportive for corporations and economic growth.
“Markets will reprice for large stimulus measures under the new administration which should favour cyclical sectors of the equity market and stoke growth and inflation expectations, leading to a rise in bond yields,” Mr Craig said.
“More stimulus increases the probability of an earlier return to pre-COVID levels of economic activity and leads to rising expectations that the Federal Reserve’s very accommodative policy stance will draw to a close sooner.”
Mr Craig said it was unlikely that the large corporate tax hikes that some investors had feared going into the presidential election would come to pass.
“Significant tax reform for companies or individuals are much more challenging to pass with such a narrow lead and the impact on corporate earnings may be less severe than feared,” he said.
“It will take some time to assess the real chance of higher taxes and the impact on corporate America as nothing is simple when it comes to U.S. politics and its processes.”