Blue Senate, Red White House

By: Sam Harris

Our last two publications have assumed the Republicans are able to maintain control of the Senate. However, there is a strong likelihood the Democrats could capture it and control both houses of the Congress. With the Senate turning blue, this week’s scenario also includes the assumption of a red White House, with President Trump remaining in office.

Hotly-contested Senatorial battles in Alabama (between incumbent Democrat Doug Jones and football coach Tommy Tuberville), Arizona (between incumbent Republican Martha McSally and former astronaut turned-Democrat politician Mark Kelly), Maine (between incumbent Republican Susan Collins and Democrat Sara Gideon), Georgia (between incumbent Republican David Perdue and Democrat Jon Ossoff), and Michigan (between incumbent Democrat Gary Peters and Republican John James) are some of the more intriguing battles, and could ultimately decide the outcome.

Inevitably though, the bottom line is how successful the Democrats are in stealing GOP seats, as they need only defend 12 this election, while the Republicans must protect 23. The DNC doesn’t have to take away many, just a few will do.

What does this mean for an outlook on government and legislation in the years to follow? What about on capital markets, which is the reason behind this series? Well, you should expect more gridlock and a slightly more defensive posture in your investment portfolio, though not as defensive as in a complete Blue Wave.

If history is an indicator, which it often is, we can probably guess how the White House behaves over the next two years or would like to behave. However, the President will have to work with the Democrats on Capitol Hill if he wants to get anything done, and vice versa. What does the crystal ball suggest?

Our Predictions:

• While it may be the proverbial low-hanging fruit, an increase (or rather continuation) of impeachment hearings and trials should be expected, with Democrats looking to oust the commander of the Oval Office.
• Though this is seen on some level already, we envision an increase in confrontation between Capital Hill and the White House, at least initially..
• A similarity shared by all scenarios; we expect an increase in government spending. The track to recovery from COVID-19 will inevitably require government initiatives coming at the cost of any potential dry powder.
• Similarly, it will come at the cost of devaluing the greenback, as we see a weakening U.S. Dollar.
• We would expect an infrastructure bill still likely to be introduced and to be inescapably passed, as that remains arguably the only current bipartisan point of agreement.
• As we go through the heat of it now, if another SCOTUS spot was to open in the months and years to come under this scenario it would most likely be unable to be filled (at least by any definition of “timely”) due to stark partisan convictions on both sides of the aisle.
• Something we have seen in recent months, as COVID-relief stimulus remains in question: presidential executive action should increase. Additionally, no repeal of existing executive orders should be expected.
• Though Democrats under this scenario would grasp control of both houses of the Congress, they still would not have enough power to overrule a presidential veto (without some key Republican flips), which can be expected at a much greater frequency if this were to happen, due to needing a 2/3s majority vote in both houses.
• As a result, as aforementioned, we expect gridlock on most legislative measures, especially on key party initiatives.
• The Trump Administration’s past four years of trade policy as foreign policy should continue, with no significant change in dealings with China, though the East Asia nation would presumably face elevated pressure and scrutiny compared to that of the past two decades.
• Lastly, we see increased downward pressure on defense department expenditures as Democrats will control the purse (the House) and head the majority of defense-related committees (Senate).

If these things end up happening, we anticipate making the following shifts in investment strategy as market conditions and tax considerations allow. The table below outlines the primary economic sectors in the S&P 500, a few sub-sectors when applicable, and other asset classes, and how we envision we will position our clients’ portfolios relative to market benchmarks.

In conclusion, this is not a far-fetched scenario. In fact, it is squarely in the realm of possibilities. Dependent upon the validity of a mail-in ballot system, as well as super-PAC-sponsored Senatorial races in key swing states, having a majority Democrat Congress and incumbent Republican White House seems entirely comprehensible. Under this scenario, Oakworth Capital Bank’s Investment Committee believes in a slightly more defensive investment strategy, with appropriate adjustments to reflect the partisan gridlock in our executive and legislative branches.

As we are well aware and cognizant to the fact that low rates are here for the long-haul (dependent on your interpretation of such measurement), we view domestic equities as the most bullish asset class, while acknowledging the enormous debt load that has been assumed not just within the past year, but in the past several years, specifically corporate.

Again, these are just our thoughts at this current moment based on a future prediction. There are so many variables that go in to place for each of these sectors that our thoughts are ever evolving.

While no one can see and predict the future with 20/20 vision, this series simply looks to interpret potential future events with purposeful intended accuracy in order to best serve our clients.

We hope you have thoroughly enjoyed this series (almost as much as we have composing it), and we hope you will come back and review our final installment next week.

A Reflection of all of the Scenarios

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.