Riding the crest of the blue wave
Yesterday evening we got the results of the Georgia runoff elections. The Democrats won both of the seats which means the Senate will have a 50-50 partisan split with incoming vice-president Kamala Harris having the tiebreaking vote. We would expect her to vote Democrat!
What does this mean?
It means that Joe Biden and the Democrats have a much better chance of getting through legislation and making changes to both corporate America and Main Street. Some popular Democrat policies include higher tax rates to fund more government spending, climate-friendly initiatives and increased regulation of the technology titans and pharmaceutical sectors.
What was the market reaction?
A big rally across global equity markets. The UK market hit its highest level since March. The biggest winners were those sectors which have been largely out of favour such as banks, oil and gas and mining. In general, any sectors that will benefit from increased inflation and higher interest rates led the market higher. This is the so-called ‘reflation trade’. These are also areas where investor positioning is generally underweight so as we have experienced before rotations often have a large magnitude and are swift. Previously these rotations have not had much-staying power.
Is the Senate result a gamechanger?
The margins are still very thin in terms of majorities in both House and the Senate so whilst the Democrats will have more scope to shape policy and get its chosen nominees confirmed, the usual checks and balances should mean now is not the time to completely rip up the playbook and start over!