What a blue sweep in the US means for investors

The wrap-up of the Georgia runoffs and Congress's certification of the US presidential election results brings a long election season to a close. Both Democratic candidates won their Senate races in Georgia, by razor-thin margins, handing the Democratic Party control of the White House and both chambers of Congress. While the narrowness of this "blue sweep" outcome falls short of the emphatic “blue wave” many had expected in the final run-up to the November election, the result does mean that the Democrats will set the congressional policy agenda for the next two years.

We believe the new composition of the US government has the following policy and investment implications:

1. Further fiscal stimulus is likely. A unified government will smooth the path to more fiscal stimulus. Statements from the president-elect suggest further spending proposals are likely to be put forward in the near term. We think the reflation trade, which favors cyclical stocks, remains intact and has further to run. This was reflected in price movements in the wake of the Democrats' victory. On 6 January, the equal weight S&P 500 significantly outperformed the main parent index and the small-cap Russell 2000 index surged 4% to a new record high. In contrast, the Nasdaq declined as investors rotated out of defensive tech and on concerns over the potential for greater regulation of big tech.

Ten-year Treasury yields rose and the yield curve steepened as investors anticipate both a stronger economic recovery and increased US indebtedness. Financials rallied as rising rates and a steeper yield curve will help improve the sector’s earnings prospects. With the Federal Reserve unlikely to change course on monetary policy any time soon, we expect the move higher in yields will be limited. But we have a preference for both US and Eurozone financials, based on their attractive valuations and earnings recovery potential, driven in part by falling provisions. For more on how to diversify for the next leg, click here.

2. A tax increase is possible. The new administration may push for higher taxes, but we think any hike would be more limited in scope than the Democrats' policy platform. The tax hike is also likely to be smaller than the potential overall spending increases (which might be passed through budget reconciliation) and may not take effect until 2022. On balance, President-elect Biden’s policies are likely to add stimulus to the economy.

3. A boost to the green agenda. President-elect Biden has said that a focus on climate change and “building back better” are top priorities. However, Senate filibuster rules, which effectively require most legislation to meet a 60 vote threshold to advance, will remain intact. As a result, the previously announced USD 2tr climate change plan looks unlikely to be fully implemented, and there might be greater emphasis on more consensual centrist policies. But we expect continued regulatory, legislative, and fiscal support for environmentally related themes. The December 2020 COVID-19 stimulus bill included a series of key policies that would support greentech industries: clean energy, smart mobility, and energy efficiency, as well as the semiconductors that enable these technologies. Read more here on how to buy into sustainability and click here for more on "The Next Big Thing".

Following the scenes of civil disorder in Washington last week, President Donald Trump finally called for an “orderly transition” to a new administration. Greater political certainty removes one source of near-term volatility, and with vaccination programs underway, we expect investors to continue to look beyond the continuing pressure on healthcare systems and focus on the prospect of a broadening economic recovery. We retain a positive longer-term outlook for equities in general, and cyclicals in particular.

Mark Haefele

UBS AG