09-11-2020
George Lucas, Raiz Group CEO
This week Democrat Joe Biden was named president-elect after defeating Republican Donald Trump to become the 46th president of the United States.
After more than three days of counting, Biden gained the 270 Electoral College votes needed to claim victory with a win in the key state of Pennsylvania. However, Trump has still not conceded defeat, repeatedly alleging electoral fraud, and launching a spate of court action.
If Trump continues with these allegations and does not concede, then the uncertainty that this creates may cause issues for the market.
Why the US Senate race matters
This election has always been about the US Senate results for the markets. The Republicans will probably still hold the Senate, and this is what the market is expecting.
Because of the Biden win I expect fiscal stimulus will now be taken off the agenda in the US Senate, while Trump is still President until late January 2021. The Republicans will change their focus to the appointments of judges to the federal courts, which have to be ratified by the Senate as well as other initiatives that Biden may not ratify.
When it comes to future stimulus, it’s likely that the amount will be less than if the election had resulted in a so-called “blue sweep” with Democrats winning Congress and the Presidency.
On stimulus, Republicans in the Senate will likely argue that the US economic recovery is occurring without another large fiscal support package. This is supported by recent economic numbers such as the employment report. The current strength in the US economy, however, may be due to the US Federal Reserve doing all the heavy lifting and printing money. This is more likely to continue with a Republican Senate.
What the US elections mean for Australia
On that point, looking ahead the Fed may need to print more money to do more of the heavy lifting as fiscal stimulus will do less, which will see US treasuries yields stabilise or even fall.
A fall in US yields will weaken the US dollar, meaning that domestically we will continue to see support for the Australian dollar due to commodity prices and weakening yields in the US. We are already seeing this being factored into the market for the Australian dollar.
If the US yields continue to fall significantly then the Reserve Bank of Australia will likely be forced to reduce yields further to try and keep the local currency from strengthening too much. Good luck with that.
Big tech dominance to continue
Turning to Washington’s crackdown on big tech, the risk of anti-trust cases against firms like Google and Facebook falls with a Republican Senate and Democratic President.
So, on this front expect to see long term dominance now from the large US tech companies in the US stock market. It’s not value investing, but it’s growth investing. What’s more, without a significant majority in the Senate, the Democrats will probably also be unable to increase corporate taxes. With less chance of tax hikes, there is more chance of a further market rally.
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