Ethenea: Double Democratic victory likely to bring volatility to the US equity market

Ethenea: Double Democratic victory likely to bring volatility to the US equity market

7 januari 2021

Verenigde Staten
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Andrea Siviero, Investment Strategist at Ethenea Independent Investors, comments below on the Democrats' double victory in the Georgia Senate run-off elections.

The - surprising - double victory of the Democrats in the fight for the two crucial Senate seats in Georgia is likely to lead to some volatility in the US equity market. Since the presidential election in November, markets have reacted positively to the idea of a Democratic President with a split Congress. This constellation would have prevented the Biden administration from implementing some of the more controversial items in its programme, such as reversing corporate tax cuts or imposing stricter antitrust laws. This scenario was already priced into market expectations.

The election victory of the Democrats should now lead to some volatility. The positive news for the markets of the expected larger fiscal stimulus could be offset by the risk of higher corporate tax rates. The so-called "blue sweep" - Democrats holding the Presidency and both chambers of Congress – could provide a boost to cyclical stocks and extend the rotation from growth stocks, typically the Nasdaq, to value stocks, typically the Dow Jones or the small and medium caps of the Russell 2000, as Biden's planned stimulus programme will support the economic recovery and cyclical companies. In addition, we are also likely to see a rise in US Treasury yields, as the market should now expect a larger fiscal stimulus in 2021 and higher bond issuance.

With the new 50-50 vote split in the Senate, incoming Vice President Kamala Harris will have the tie-breaking vote. Democrats will need to ensure that their own ranks in the Senate are united to pass the pieces of legislation considered the most contentious - so there is still some uncertainty here too, which will be reflected in market developments.

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