Tuesday’s Georgia runoff elections will decide who controls the national legislative agenda — President-elect Joe Biden or Senate Majority Leader Mitch McConnell. If Democrats win both races and wrest back control of the Senate, expect fireworks. Wall Street has been betting that gridlock will prevail and nothing much will get done.
The stock market sold off sharply Monday on a variety of possible factors, including tax selling in the new year. But there’s no doubt that growing expectation of a Democratic Senate is in investors’ sights, with election and policy uncertainty returning.
Unified Democrat control of Congress would hinge on a Senate tiebreaking vote by Vice President-elect Kamala Harris. Yet even that margin could have huge implications for tax and spending policy, the shape of the coronavirus recovery and the stock market outlook.
Will Georgia Runoffs Fast-Track $2,000 Stimulus Checks?
Just consider how McConnell singlehandedly blocked President Trump’s demand to turn $600 stimulus checks into $2,000 checks last week. Democratic victories in Georgia’s two Senate runoffs would ensure a much more forceful coronavirus fiscal stimulus package, including aid to state and local governments.
Yet that’s just for starters. A Democrat-controlled Senate would likely produce a far more massive infrastructure package than if the GOP has its way. Biden’s plan to boost health insurance subsidies might well pass. So might his plan to create a public insurance option for those ineligible for Medicaid. Even empowering Medicare to negotiate drug prices might be doable. To help pay for Democratic priorities, Trump’s corporate tax cut would likely be on the chopping block.
How Biden Agenda Could Pass Via Budget Reconciliation
Most legislation is subject to Senate filibuster rules requiring 60 votes. Still, Democrats could try to pass much of the Biden agenda through budget reconciliation, which requires a simple majority. That’s just what the GOP did in 2017, when they passed the $1.5 trillion Tax Cuts and Jobs Act, 51-48.
Senate rules allow for one tax and spending package to be passed per year, after a budget resolution is approved. With McConnell in charge, there would be no budget resolution and, therefore, no shortcut to passing legislation.
Yet budget reconciliation is reserved for measures that are primarily budgetary in nature, meaning they produce a change in revenue or outlays. For example, the 2017 tax law reduced the ObamaCare individual mandate fine to zero, instead of killing the mandate outright. It’s up to the Senate parliamentarian to determine which legislative provisions comply. That leaves some doubt as to what Democrats can do via reconciliation.
Budget reconciliation rules require that the legislation doesn’t add to deficits after 10 years. That forced the GOP to sunset the 2001 George W. Bush tax cuts at the end of 2010. For Democrats, any permanent spending plans would have to be paid for with budget offsets. Beyond the obvious possibility of tax hikes, spending cuts via Medicare negotiation of Part D drug prices might serve as an offset.
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Would Centrist Democrats Play Ball?
Centrist Democratic senators, including Joe Manchin of West Virginia, also could limit the scope of legislation.
Nomura chief U.S. economist Lewis Alexander wrote that “a significant infrastructure bill” could pass if Democrats win the Georgia runoffs. “But it is not likely to be the climate-focused $2-trillion bill that Biden proposed during the campaign.”
Alexander sees another $1 trillion in Covid relief as likely, but meaningful tax hikes as doubtful. The need for unanimous Democratic support in the Senate “likely means the corporate tax rate will remain at 21% and unchanged capital gains taxes.”
Yet Goldman Sachs analysts Dominic Wilson and Vickie Chang think that the corporate tax rate could end up halfway between the current 21% rate and Biden’s proposed 28% rate, should Democrats prevail.
If Democrats win both Georgia runoffs, the public health and economic crisis could help to grease the wheels of major tax and spending legislation. If moderate Democratic senators are on board, a massive package could quickly come together.
Georgia Runoffs May Continue Stock Market Rotation
Gridlock is usually good for the stock market. Some analysts see a short-term stock-market sell-off as possible if Democrats capture both Senate seats.
“Equity markets might sell off on fears that Democrats would be able to use their majority to push through Congress an agenda that is more aggressive than the market has currently priced in,” Brian Gardner, Stifel’s chief Washington policy strategist, wrote in a Monday note. “We think that would be an overreaction,” he added. Gardner stressed that high hurdles will remain to passing partisan legislation.
Still, doubling down on fiscal stimulus looks likely and would add fuel to the coronavirus recovery. That could continue the revival in cyclical stocks which kicked into gear with Pfizer‘s (PFE) Nov. 9 vaccine results.
Even if the overall market takes a hit, infrastructure stocks like Caterpillar (CAT) and Vulcan Materials (VMC) should get a big lift.
Expectations of a flood of fiscal support would boost projections for economic growth and send the 10-year Treasury yield north of 1% for the first time since March. The accompanying rise in mortgage rates may be a slight dampener for housing.
Big Tech In The Mix
Rising long-term Treasury yields also may be a headwind to growth stock valuations. FANG stocks, including Facebook (FB,) Amazon (AMZN), Neflix (NFLX) and Google-parent Alphabet (GOOGL), have underperformed the broad stock market advance since Nov. 9. Investors may expect big tech’s pandemic strides to reverse or slow as life normalizes post-Covid. Antitrust efforts also have weighed on the sector.
The threat of tax hikes, if Democrats win in Georgia, could be a further headwind. Big tech firms paying low effective tax rates may feel the biggest sting from Biden tax proposals. He backs a minimum 15% tax on book income, or income reported to shareholders.
Democrat victories in Georgia also could continue a rotation into emerging market stocks amid a weak dollar and reviving global growth prospects.
Health Care Stocks Face Ups And Downs From Biden Agenda
If Democrats win both Georgia runoffs, managed care stocks may come under pressure. But it’s too soon to judge whether that will be warranted. A big question is whether the public option Biden pursues is broad or narrow. For example, he’s talked about providing a public option in states that didn’t expand Medicaid. Doing so wouldn’t compete against commercial insurance and would expand the pool of insured. A broader public option that curbs reimbursements for health care providers would be more of a threat, but is less likely.
Increased health insurance subsidies to use in the state health exchanges could boost enrollment, also a positive.
JPMorgan analyst Gary Taylor sees hospitals HCA Healthcare (HCA), Tenet Healthcare (THC) and Community Health Systems (CYH) as beneficiaries of a Democrat-led Senate. Drug stocks including Merck (MRK) lost ground as the House advanced its drug-pricing plan in 2019. There might be a repeat, if Democrats win, despite uncertainty over whether Medicare negotiation could be passed through reconciliation.
Georgia Runoffs Outcome: Like 2008 Or 2010?
Tuesday’s Georgia runoffs will determine whether the 2020 election is more like 2008, when President Obama’s election ushered in an expansion of government and higher taxes amid the financial crisis, or 2010, when the GOP won control of the House and hit the brakes on fiscal policy.
The stakes appear magnified now because because U.S. debt levels are much higher now and deficits are expected to stay elevated. Meanwhile, the Federal Reserve has pledged to keep its key interest rate near zero until the U.S. labor market is healed and inflation is running firmly above its 2% target.
More fiscal expansion would speed up the labor market recovery, in effect making the Fed’s monetary policy stance easier than it is now. In that case, Wall Street might anticipate a quicker wind down of Fed asset purchases, a negative for stock prices. Alternatively, additional doses of fiscal stimulus would likely lift inflation expectations and add to the downward pressure on the U.S. dollar against other currencies.
On Monday, the U.S. dollar index fell close to a three-year low, while the spot gold price jumped more than 2% to about $1,940, as investors price in higher odds of Democrats winning both Georgia races.
Gold surged to an all-time high in 2011, then lost about 45% of its value over the next four years as fiscal and monetary policy normalized. That’s not to say the gold price will suffer the same fate if Republicans prevail in at least one Georgia race. However, the super-bull case for gold built on loss of confidence in the dollar could take a hit.
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