Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Democrat nominee, Raphael Warnock, has defeated Republican candidate, Kelly Loeffler, to win one of the two runoff elections in Georgia for the US Senate. Fellow Democrat, Jon Ossoff, looks likely to take the remaining place, with the votes yet to be counted coming from pro-Democrat areas.

Yesterday, the Republicans held 50 Senate seats, Democrats 48. At the time of the election in November, it was widely assumed that the remaining two seats would remain in Republican hands. Since then, Republican confidence has wavered, and the margins have narrowed.

After Warnock’s victory, the balance stands at 50-49. Were Ossoff to win his place too (an outcome that looks close to certain), the Senate would be tied 50-50. Vice President Elect, Kamala Harris, would then use her tie break in favour of the Democrats, assuring a so-called “blue sweep” of Democrat control over the Senate, the House of Representatives and the White House.

What it means for markets

From an investor’s perspective, the new-look Senate is almost as significant as the new man sitting in the White House. Were Republicans to have retained control of the Senate, the result would have been a “gridlock” scenario, where Biden’s efforts at reform would invariably have been frustrated by an uncompromising Senate.

With Democrats now in control of both houses of Congress, Biden has far more freedom to push through his agenda. Areas of focus will include relief packages to tackle the COVID-19 pandemic, counteracting the climate crisis, and addressing societal inequalities.

For markets, two areas (for now) stick out - stimulus and taxes.

Biden will be keen to push through a significant fiscal stimulus package. Though that will push national debt higher, investors reacted favourably to other relief packages over 2020. Any package should encourage a faster economic recovery and ultimately prove a boon to stocks in the long run.

On the flip side, Biden has pledged to increase the corporate tax rate from 21% to 28%. That’s worrying Wall Street - stocks fell sharply to open 2021 as the odds shifted in favour of the Democrats. This morning, US futures - bets on the direction of the S&P 500 - fell 0.7%.

In reality, the chances of any major tax hikes during Biden’s first years of office are small. Though control of the Senate is a massive boost for Democrats, that control is nevertheless marginal. They will still face obstruction from centrist Senators who hold the purse strings. It’s unlikely Biden will get too much through before the 2022 midterm elections. This may not be gridlock, but it’s certainly no open bar.

What it means for you

Markets appreciate certainty. The surprising turn of events in Georgia puts the prospect of significant legislative changes over the next four years well on the horizon. Investors are likely to be concerned for the timebeing.

But a changing landscape can be good news for savvy investors. Here are a few areas to keep an eye on.

Additional fiscal stimulus is likely to increase spending and push up inflation. That matters for a few reasons. Firstly, as has been apparent this morning, inflation expectations will push up bond yields. That in turn is likely to weigh on share prices, which were supported throughout 2020 by low bond yields. At the same time, the US is very keen to keep yields under control. Ultimately, the impact here should remain slight for a number of years.

Secondly, greater stimulus should support a rotation away from the sort of large, growth-heavy stocks that buoyed the US market through 2020, and toward the out-of-favour, “value” stocks which suffered. In other words, that’s bad for the Big Tech stocks that dominate the market and good for small to medium-sized companies.

Over 2020, companies like Apple and Amazon enjoyed a low interest, low inflation environment. They came to dominate many fund managers’ portfolios. Not only does that environment suddenly look challenged, they’ll also have to deal with Democrats promising greater antitrust rules and higher taxes. At the time of writing futures on the tech-heavy Nasdaq index fell 1.9% this morning - remember that the S&P 500 fell only 0.7%, by comparison.

Today could present an opportunity to reflect on your portfolio and consider diversifying to cover all eventualities. Our Select 50 features growth-heavy US funds like the Brown Advisory US Sustainable Growth Fund as well as the Schroder US Mid Cap Fund, which has a more value focus.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered:

Volatility; Active investing; Funds; Shares; North America

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