A Blue Wave

By: John Norris

It is entirely possible the Democratic Party could sweep to victory in the House of Representatives, the Senate, and the Presidency. As we all know, President Trump has been polarizing during his time in office. Whether this is strictly due to the man or whether it is the new normal to vilify your opponents’ officials remains to be seen. It is probably a combination of the two.

Not so long ago, the low-hanging fruit, the path of least resistance, was to predict the Democrats would maintain the House and win the White House, and the Republicans would retain a slim majority in the Senate. This would have probably led to two years of legislative ‘gridlock’ in Washington, and that was an acceptable outcome to a lot of folks. However, with 23 Republican seats up for grabs compared to only 12 for the Democrats, 3-4 surprises could change the Senate’s complexion. Worrisome for the GOP, is 3 Republican Senators are retiring after this term.

So, what could happen if the Democrats are somehow able to ‘pickup’ the necessary seats in the Senate, maintain the House, and sweep the Biden/Harris ticket into 1600 Pennsylvania Avenue? The so-called ‘Blue Wave.’ It isn’t terribly far-fetched.

Based on what we have read and know about the Democratic Party’s stated economic platform, we believe the following are likely. We would strongly encourage everyone to go to the following website, read the proposals, and make their own ideas.

Click here to view Joe Biden's website.

Our Predictions:

• The platform is pretty clear: the intention is to raise marginal tax rates on corporate America and high-income earners. Further, the proposed extension of the Social Security Tax Limit from $137,700 to $400,000 will be a ‘stealth tax’ which will be expensive for corporate America and many households.
• After a rolling back of the regulatory environment during the Trump Administration (eight cuts for every new one according to whitehouse.gov), it is highly unlikely the Democrats will maintain these policies. As a result, we envision some measure of increased regulation on American business after a Blue Wave.
• The Federal minimum wage in the United States will increase to $15/hour.
• The Federal government will encourage, and even push for, greater unionization of workers.
• The Federal government will encourage ‘green energy initiatives,’ and actively discourage fossil fuels.
• The Federal government will ‘tackle’ big business and the threats the Democrats believe they present to the economy and society. They will first target pharmaceuticals and information technology, but financials won’t be too far behind.
• We envision a Blue Wave will lead to increased Federal expenditures. Much of it will be in co-called entitlements programs and societal initiatives. However, the Congress will also have to fund the necessary buildout of its ‘Green New Deal.’ As such, we also anticipate an increase in infrastructure spending.
• In order to help pay for these increased expenditures, the Congress will have to cut money elsewhere. The low-hanging fruit, and largest discretionary budget line item, will be the Department of Defense.
• Due to higher taxes, greater regulation, and more labor friendly policies, there will be a decrease in overall business owner sentiment. This will be especially true at smaller and medium sized companies, as the absolute dollar amounts needed to comply with the relative changes will be a much greater financial burden the smaller the company.
• Foreseeing a potential decrease in profitability, corporate America will likely reduce overall expenditures and new hiring until it has time to adjust to the new rules.
• This should lead to a slightly slower economy, overall, which could lead to continuing weakening of the US dollar, all other things being equal. It could also mean the DNC might have to postpone some of the more progressive aspects of its platform until the economy stabilizes.
• Finally, after the Trump Administration’s blunt use of trade/economy policy as foreign policy, a Blue Wave would likely usher in a somewhat greater acceptance of globalization and a less antagonistic approach in diplomacy.

If these things do 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, there is a real possibility the Democratic Party will sweep to complete victory in November. If that happens and IF the Democrats do what they say they intend to do, there will be significant implications for US investors. The Oakworth Capital Bank Investment Committee believes investors should adopt a more defensive position in their portfolios, but not a panicked one.

After all, while returns could be lower after a Blue Wave, the US economy is still the most entrepreneurial and dynamic major economy ever known to man. This makes us bullish on US stocks over the long haul, even if only cautiously optimistic in the short-term.

Again, no one can look into the future with crystal clarity, but we are anticipating what changes could occur and intend to capitalize on them for our clients.

We hope you enjoyed our comments on what we think the Blue Wave could mean for investors. Next week, we will answer the question:

What happens if the Democrats win the House and the White House, but the Republicans maintain control of the Senate?

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.