Orion Advisor Solutions

The (presumed) policy implications of 11/3/2020

Assuming a divided U.S. government with a Democrat president and House but a Republican Senate through 2022, the 2020 election implies regulatory gridlock limiting major policy changes, unlikely tax increases, uncertain COVID-19 relief, steady but moderate economic recovery with low inflation and bond yields, a weaker dollar favoring emerging markets, and historically strong U.S. equity market performance averaging 13.6% annual returns under similar political conditions.

While we won’t know for sure which party will control the US Senate through 2022 until Georgia decides both of its US Senate elections via a January 5, 2021 runoff, we are comfortable assuming the United States will face a divided government the next two years, with a Democrat in the White House, a Democrat-led House of Representatives, and a Republican-led Senate. With that assumption, we can consider the policy implications of the 2020 election:

  • While the White House can favor or frustrate specific industries from a regulatory perspective, big policy changes require holding both ends of Pennsylvania Avenue, and neither party will, resulting in gridlock. We see positives and negatives for the market in a divided Washington, D.C.
  • Taxes are unlikely to rise (a positive), but another large COVID-19 economic rescue package is less certain (a negative).
  • Assuming incremental, but not excessive, fiscal support for the economy, we expect the economic recovery will continue, but won’t accelerate; bond yields and inflation expectations will remain low; P/E ratios will remain high; the US dollar will be biased lower; equities will be biased higher, and growth stocks will outperform value stocks.
  • A Biden Presidency likely means a more predictable geopolitical dynamic, particularly on trade, and that, along with a weaker dollar, could favor ex-US markets, particularly emerging markets.

Finally, US equities have done best under a political construct with a Democrat in the White House and a divided Congress, delivering an average annual return of 13.6% going back to the early 1930s. If the past is prologue, the next few years could be very good years for the market.