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US Election, the final act?

08 January 2021

Jonathan Marriott, Chief Investment Officer

The invasion of the Capitol by Trump supporters protesting the election result was shocking, but had little impact on the market. In the end, the Democrats gaining both Senate seats in the Georgia run-off elections will be much more important. This means that the Democrats gain control of the Senate using the Vice-Presidential casting vote, which in all likelihood should result in bigger stimulus plans and infrastructure spending. However, with the smallest of margins in the Senate, it may be hard to push through a left-wing agenda and to reverse the tax cuts from the Trump Presidency. The equity market took this news well, with the S&P 500 making new highs. 

The extreme bitterness in American politics, fanned by President Trump disputing the election result, culminated in the attack on the Capitol on Wednesday. This has shocked US politicians on both sides of the aisle. There is now talk of using the 25th amendment to the constitution to declare Trump unfit to continue in office or to impeach him. He is only in office for another twelve days so there may not be time to complete this process. Trump, who on the day had described the protesters as patriots, last night condemned them. This latest change of tone may be in response to the threat of removal. The most important thing is that Congress completed the ceremonial process of counting the Electoral College votes and even President Trump, who still disputes the result, finally conceded that there should now be an orderly transition to a Biden Presidency on 20th January. It is to be hoped that the shocking attack will inspire politicians from both parties to pull back from the extremes on both sides to come to a consensual moderate way forward.

Joe Biden may only have the narrowest of majorities in the Senate, but he should now be able to go ahead with appointments to his Cabinet and other positions without interference. Some policies may still be hard to get through, but he will want to move ahead with his agenda in the next two years before mid-term elections could upset the balance in the Senate. An early pandemic stimulus package will be a priority. Increased infrastructure spending, particularly to counter climate change, will also be a priority.  US equity markets have made new highs on the prospect of a faster recovery. The expectation of increased spending under the Democrats caused a sell-off in US Treasuries with ten year yields rising above 1% for the first time since March last year. US inflation-protected treasuries outperformed this sell-off as inflation expectations rose above the Federal Reserve 2% target. The Fed is likely to keep rates low and may want to control the rise in long-term interest rates if it continues.

The events on Wednesday and the rise in COVID-19 infections and deaths are alarming, but, for now, financial markets are focusing on the economic recovery. A view boosted by vaccine delivery and increased stimulus packages.

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