The news networks have projected that Democratic candidate and former Vice President Joe Biden has won the 2020 presidential election and will be the 46th President of the United States of America. Although some recounts and legal action may still be outstanding, markets have rallied over the past week on the back of more clarity and less policy uncertainty.
Investors have also been focused on the Senate, where Democrats and Republicans have each secured 48 seats. The final tally will not be known until the two Georgia runoff elections in January, but the math suggests either a Republican or razor-thin Democratic majority. In either event, the Democratic “blue wave” that investors had feared would unify government and lead to significant policy shifts has evaporated.
Under a divided government, we would expect a moderate fiscal package (approximately $1 trillion) and limited legislative potential otherwise. Significant changes in tax policy would probably not happen. Multi-trillion-dollar fiscal spending would also be off the table. A divided government reduces regulatory risks in our view, and leaves incremental differences in regulation dependent on White House control. Even a slim Democratic majority would likely limit the scope of potential policy to the realm of executive order or moderate reconciliation.
The economic implications of this outcome do not significantly change our forecasts.
For markets, we believe a divided government allows investors to move on to focus on fundamentals.
In 2021 political risks may remain top of mind, but we think the key drivers of the macro and market environment will be COVID-19, a potential vaccine, re-opening, and recovery.
1GSAM Connect: Can the Equity Growth Spurt Last?