A divided government is likely
While Joe Biden has been elected as President, the race was closer than many anticipated and it’s possible that the Republicans may maintain control of the Senate by a narrow margin. We probably won’t know the final makeup of the Senate until January 2021, when one of the two Senate seats in Georgia holds a runoff election, though projections are for a one-seat Republican majority as Georgia is historically a Republican state.
As the ‘blue wave’ Democrat sweep didn’t eventuate, the US is likely to be left with a divided government with Biden as President, Democrat control of the House and a thin Republican Senate. Overall, this may result in gridlock for some key Democrat policies such as higher taxes and financial regulation. Biden has a long history in the Senate and could be well positioned to negotiate policy initiatives, although it is unclear how the Republicans will use their thin majority.
What’s the market reaction?
Markets have been buoyed by the combination of a Biden victory and a thin Republican Senate majority. This is because markets perceive that a Senate gridlock may see more ambitious Democrat spending and regulatory policies wound back while policies targeted at stimulating growth and controlling COVID-19 will be delivered. As a result, fiscal stimulus will be more modest than could have been the case under a Democrat sweep of the Presidency and Senate. However, if growth were to sharply fade, the US Federal Reserve could step up by easing monetary policy further.
Biden will probably be a more conciliatory and steadier President, particularly on the trade and foreign policy issues that have bothered markets under Trump’s Presidency. While tensions between the US and China could continue, it may be less overtly confrontational and focus on points of disagreement rather than blanket tariffs. This should also support emerging markets.
For Australia there are few direct implications other than a likely steadier regional policy which should be slightly more positive for the Australian market. We also expect that Biden will look to rebuild relationships with its traditional democratic partners such as Australia, Japan, the EU and now also India.
What should investors do?
While the US election completely gripped the world’s attention it’s important to put it into context. Historically US politics catches headlines but doesn’t have such an impact on financial markets, which are primarily driven by earnings and US Federal Reserve policies. While any stimulus and continued easy monetary policy will continue to support markets, at this stage the earnings outlook for 2021 has improved sharply from a very low base in early 2020, although we note that markets are already fully reflecting this recovery. However, clearly the impacts of the COVID-19 pandemic will continue to hang over markets once the election headlines settle.
While the world slowly emerges from the COVID-19 recession, it may continue to be a bumpy ride ahead. However, policy makers remain prepared to ease policy to build a bridge to a post-pandemic world.
If you’re feeling unsettled speak to your adviser about the financial strategy they’ve designed to help your investments weather this complex market environment.
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