The Independent Market Observer

Washington Turns (Very Light) Blue

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jan 6, 2021 1:51:36 PM

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washingtonToday should be the day we see Washington start to turn blue. With the Congress meeting to count the inaugural votes and with the Georgia Senate runoff likely to show both seats won by Democrats, all three arms of government will be under control of the Democratic Party come the inauguration.

It’s true the story isn’t over yet. Members of both houses of Congress are set to object to electors from some states, and the final numbers from Georgia are not yet in. Still, it is time to start thinking about what a blue government will mean for us as investors.

The Potential Bad Stuff

In the short term, the biggest drawbacks are probably higher tax rates, for both business and individuals. These could directly hit corporate earnings and, therefore, stock prices. After that will be more regulation and a more active anti-business approach, especially around the big tech companies. This shift could certainly affect sentiment and, with it, the markets. We need to keep an eye on both tax and regulatory policy going forward, and we will be talking about that here as things unfold.

The Good Stuff

In the short term, a $2,000 stimulus check is now much more likely, with a Democrat-controlled Senate likely to allow a vote and bipartisan support, led by President Trump. Given the most recent weak job numbers, this money would be a significant help. We are also more likely to see federal help for states and municipalities, which would support another weak area of the economy, especially in vaccine distribution. The upside of more government spending is that we need it, in the short term. Longer term, we are also likely to see more spending on infrastructure, with bipartisan support, and a more constructive trade policy.

In other words, as usual, there will be both good and bad, and the end result will be somewhere in the middle.

Mainstream Policies?

What I do not expect to see are policies that are wildly out of the mainstream. Even in a blue Washington, there simply aren't the votes. Yes, the Democrats control the House, but with a smaller minority than in the last Congress. The votes for anything radical just won't be there. Similarly, even if the Democrats win both Georgia Senate seats, that takes them to 50 plus the vice president’s tie-breaker vote. One defection and they no longer have a majority.

There are two proven defectors (Manchin and Sinema), along with other centrist senators, who will prevent anything radical. Biden himself is also a centrist, more than anything else. While the Republicans may have lost the leadership of both houses, they still have commanding minorities that can block anything out of the mainstream. In that sense, nothing has really changed in terms of what policies can be passed.

The big difference, then, between the last Congress and this one is simply that Democrats will be able to introduce policies in the Senate and actually bring them to a vote. But they still won’t be able to pass them without Republican support. The first example is likely to be the $2,000 stimulus checks, which never got a vote in the last Congress and likely will in this one. With bipartisan support, that is likely to pass now that a vote will be allowed, and it won’t be the last bill like this. Infrastructure spending is another example. The Democrats can propose, but the Republicans will still dispose. The Green New Deal, for example, will still be dead on arrival.

Politics As Usual

From an investor’s standpoint, while there are certainly risks (see above), there is also a lot to like here. While government has done a great deal to support the economy through the pandemic, more is needed over the next couple of months. While much has been said about infrastructure spending, not much has been done—and it is needed. In other words, there are a lot of things that the Democrats will want that responsible Republicans can agree with, even as they can fight against things with which they disagree. There is a real chance that politics may turn back to something approaching what we used to call normal, where widely supported policies pass.

That would be a good thing. The real takeaway here is that, yes, Washington is turning blue. But it is a very light shade of blue and one that is likely to show spots of purple or even red on occasion. This isn’t the blue wave; instead, it's something much closer to politics as usual. Despite the risks, as an investor, I am comfortable with that.

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