Whether the platform, which calls for increases in corporate and individual taxes of USD 3.4 trillion to help fund USD 5.4 trillion in new spending on education, green infrastructure, housing, and healthcare, will be feasible, will depend not only on Biden winning the presidency, but also on Democratic control of Congress, and of the Senate in particular.
On the policy front, Biden’s plans appear clearer than the direction the Republicans are likely to take in a second Trump term. On the proposals for what is likely to be post-election stimulus, there are major differences between the two parties. The Democrats have been pushing a set of measures worth as much as USD 2.5 trillion, while the Republicans have favoured a USD 650 billion package.
Control of the Senate = implementation
To implement their policy agenda – and win support for their stimulus plans – the Democrats would need to not only win the presidency, but achieve a workable majority in the Senate and maintain their hold on the House of Representatives. Such a Democratic ‘clean sweep’ would likely lead to greater fiscal stimulus, perhaps worth as much as 10% of US GDP, than can be expected from a divided Congress under either President.
The key to Biden’s plans becoming a reality is a Democratic Senate. Of the 100 seats in the upper chamber, 35 are on the ballots on 3 November and a third – 12 – are particularly hotly contested.
The Republicans have to defend 23 of the seats up for election, compared to 12 for the Democrats. However, many of these races are extremely safe for one party or the other. It is likely that the ultimate balance of power will be determined by the outcomes in a small number of states with Republican incumbents.
To take control of the Senate, the Democrats need a net gain of four seats to take them to 51 (or three if Joe Biden wins the presidency as then Vice-President Harris would be able to cast a tiebreak vote).
A shot in the arm for risk assets
On balance, we think risk assets would generally welcome the kind of sizeable fiscal stimulus the Democrats envisage, although the proposed tax increases could weigh on corporate securities. Yields of US Treasury bonds would likely increase and the yield curve would steepen. Inflation expectations would be expected to rise.
What a Democratic victory could mean for equity markets can be divined from the relative performance of several sectors in the week after the first presidential debate on 29 September when polls indicated a sharp swing in Biden’s favour.
Renewable energy, healthcare insurance, and managed healthcare indices outperformed the broad market, while fossil fuels and pharmaceuticals lagged.
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