We will not know for sure who has control of the Senate until run-offs in Georgia in January. Although the Republican candidates are favoured, and in prior run-offs in Georgia in 2004, 2008 and 2018 Republican candidates have won the Senate seats, there is still a small chance of the reappearance of the “blue wave†trade.
With Republicans retaining control of the Senate, the prospects of a deal on a large stimulus package are diminished. The $2trn plus that was on the cards under the blue wave could be as small as $500bn with an obstructionist Senate.
For now, markets seem to be ignoring this. The narrative appears to be that with Biden + Gridlock a smaller deal will eventually be reached, yields will not push higher as they would have with a larger stimulus package, the Fed will remain in play and rates will remain lower for longer, more QE and liquidity will be incoming and risk assets will be off to the races. In addition, no tax hikes or Trump shock factor – Biden is predictable and has not even taken office yet, markets like that certainty.
Indeed historically, the combination of a divided government has previously been the most positive outcome for the S&P 500. Although the sampling is limited and throughout those periods the economy was not in the throes of a global pandemic. The COVID-hit U.S. economy is in need of more than a skinny stimulus deal and an obstructionist senate will not be good for growth, confidence or corporate profits.
The prospects of a lame-duck deal being reached prior to Biden’s inauguration are slim, and the chances of a large stimulus package even post inaugurations are slimmer. On Friday, Senate Majority Leader Mitch McConnell doing little to recoup expectations for enacting a larger package, “Our economy is really moving to get back on its feet. That I think clearly ought to affect what size of any rescue package we additionally do.†It seems that unless the economic need becomes quite dire, a large package is not coming.
