The Democrats Win the White House & Republicans Remain in Control of the Senate

By: David McGrath

In part one of our Election Series, we looked at the ramifications of a Democratic sweep in November. If this were not to play out, the “weakest link” in the Democratic sweep argument would be their ability to take control of the US Senate. As I write this, Real Clear Politics has the race for control of the Senate at a dead heat, with 46 seats expected for both Democrats and Republicans, and 8 races classified as a “toss-up”. Of the 8 “toss-up” races, 6 are in states carried by President Trump in 2016 (NC, SC, GA, IA, MT and MI).

With this in mind, it would not be too surprising to see Joe Biden winning the White House while Republicans remain in control of the Senate.

What would be the ramification on the economy and the markets if this were to play out? Here are some of our initial thoughts.

Our Predictions:

Mitch McConnell would be able to prevent many bills from getting onto the Senate floor for a vote. This would allow Republicans to block the more progressive parts of the Biden/Harris agenda.

• This would prevent a new tax increase from taking effect.
• This would almost certainly stop the proposed “Green New Deal” from becoming law.
• The Senate floor would also be a battle ground for any Supreme Court vacancies that come open in the first two years of a Biden administration. The Republicans would still control the judiciary committee, and a true compromise candidate would be needed. This process could get ugly…

Speaking of compromise, we believe that a large infrastructure deal would still happen. This is one topic that seems to have bi-partisan support.

• A realization that if anything is going to get through congress, compromise must happen between the two parties. What a novel idea!

The expected headwinds for the healthcare sector would not be quite as strong if Republicans retain the senate.

Almost immediately, President Biden would use executive orders to undo many of Trump’s executive orders, with a focus on immigration reform and environmental protection.

With the Biden administration seeing a roadblock to their plan for higher taxes in the Senate, the White House will look to reduce funding at the Department of Defense to help fill the gap in the budget.

Even with the lower funding for military, the national debt will continue to grow exponentially under a Biden administration. Expanded funding for social programs, increased health care costs from expanding Medicare, and helping state and municipalities shore up their underfunded pensions will lead to the exponential growth of the national debt that currently sits around $26,760,000,000,000 (give or take a couple hundred million). Or as they say in D.C., just over a quarter quadrillion.

As for the stock market reaction, the shared power structure in congress with a Democrat in the White House is a combination that stocks have historically seen the strongest returns from. The inability to push corporate taxes back up, along with a more conventional (less confrontational) approach to negotiation of trade deals, should allow an environment for stocks to have a solid potential for returns in spite of the increased regulations and climbing debt levels.

If the Democrats come up only one seat shy of controlling the Senate (49-51), you will see lots of pressure on any Republican senators from a blue state to change from a Republican to an independent. The Democrats would be able to offer significant leverage to any senator willing to make the jump. Back in 2001, this exact scenario played out, when Senator Jim Jeffers of Vermont changed from Republican to Democrat, giving control of the Senate to the Democrats.

A one or two seat “win” for the Republicans would also reignite the cry to have the District of Columbia become a state (every license plate in D.C. holds the slogan “taxation without representation”). With the large majority (around 75%) of the population in D.C. registered as Democrats, an extra 2 Senate seats and a few extra electoral college points each election in favor of the Democrats could have a significant impact on the direction of the country.

If this scenario ends up playing out, we would anticipate the political gridlock in congress would end up having a neutral weight on several of the economic sectors.

As with last week’s Blue Wave, this scenario is a very real possibility. That is IF we can still believe the pollsters, which isn’t a foregone conclusion. If it does happen and if the two political parties behave the way they say there are going to behave and act the way they have in recent memory, the United States could face a couple of years of legislative gridlock. History suggests this isn’t necessarily a bad thing.

Even so, the Oakworth Capital Bank Investment Committee believes investors should adopt a somewhat defensive posture, but slightly more aggressive than they would or should following a Blue Wave. After all, the US economy is still the most dynamic major economy in the world. This makes us bullish on US stocks over the long haul, even if only cautiously optimistic in the short-term.

As John wrote last week, no one can look into the future with certainty. However, this series is our attempt to anticipate the economic ramifications of the national election, and how to best position our client’s portfolios.

We hope you enjoyed these comments on what we think a Republican controlled Senate in a sea of Blue in Washington could mean for investors. Next week, we will answer the question:

What happens if nothing changes? The GOP holds onto the White and the Senate, and the Democrats maintain control in the House.

Read the full 2020 Election Projection series here:

As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.