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What the January Senate wins mean for markets

In a week of dramatic events that led to the US president facing his second impeachment proceedings, the US also saw the Georgia senate run-offs decided. Rebecca Cretney explains what that should mean for markets. 
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Published 12 January
5 mins

In a week of dramatic events that led to the US president possibly facing his second impeachment proceedings, the US also saw the Georgia Senate run-offs decided. Despite the predictions of many polls, the Democrats won both seats effectively giving them ‘control’ over the upper chamber of Congress, in addition to their three-seat majority in the House of Representatives. And although both parties each have half the Senate seats, the inauguration of Kamala Harris as vice president will enable her to cast a vote in any tie-breaks in the Democrats’ favour.

But, as with every news headline coming from the US, it’s not that simple. Yes, the seats mean that President Joe Biden should, from 20 January, be able to push through his cabinet candidates and put forward his agenda for legislation. It does not mean, however, that the Democrats will be able to make substantial changes. Why? Because a party actually needs 60 votes in the Senate to stop the debate over a bill and enable a vote to take place. Without 60 members, senators can individually, or as a group, use filibusters to hold the floor and prevaricate until time runs out. And without 60 votes, there is little likelihood that the filibuster rules will be changed.

What that means for markets, however, is probably irrelevant. 2020 gave us multiple examples of a disconnect between Main Street and Wall Street, a trend that appears to be continuing into 2021. When Capitol Hill was under siege, something that hasn’t happened since 1814, stock markets rose in value. What’s happening in the news does not necessarily move investor sentiment, not least as there are so few options for positive portfolio returns. So what’s next for the US?

The first and biggest priority for the incoming Biden administration will be the pandemic. While the rest of the world has entered lockdowns, or put in place varying restrictions on who can do what where, this has been largely absent from the US. Although what can be done at a federal level versus a state level is questionable, there could have been more coordination. Getting a handle on what’s really happening and lowering the number of deaths below the 4,000-a-day record recently registered will be key to sustainable market growth, in particular beyond the sectors that benefit from current conditions.

In tandem with this will be the rollout of vaccines, which should spell an end to the economic fallout that has manifested in multiple ways. Vaccines provide the light at the end of this tunnel and the chance for broader economic growth that will fuel cyclical and value stocks further – as we saw in November.

The rollout of vaccines, meanwhile, is critical given markets have been shown to look two-to-three years into the future and probably anticipate life after the next set of US elections roll around in 2022, when far more Senate seats will be contested than in 2020. They might be looking towards a time when there could be a substantial change to the powers that be, yet again. One thing that will bolster markets – aside from a quick agreement on a stimulus package – is some of the hands of experience that will be guiding the tiller of the US economy. Far less time will need to be spent refreshing Twitter feeds and, as such, more time can be focused on long-term sustainable growth – green or otherwise.

With plans to invest in a wall across the Mexican/US border no longer on the horizon, more traditional opportunities for investment in US infrastructure will come under debate in the future. As such, we may yet see a Green New Deal developing momentum, which would benefit many of the alternative investments our portfolios offer exposure to. The ‘blue ripple’ that flowed from 2020 decisions may yet become the much vaunted ‘blue wave’ and a dramatic about-turn in capitalism.

At the same time, we expect a much more coordinated, thoughtful approach to China. In-step approaches by Western nations, and a realisation by Australia, Japan and South Korea that there is support for a united front against the dictates of a nation that is set to become the world’s largest economy in 2028, should also help a global economy regain momentum.

When COVID-19 first hit, there was a veritable alphabet soup of possible directions for the global economy, including the US. From a sharp V through to an extended L, the reality is we have seen a K-shaped response. Some parts of the economy (such as the communication services and tech sectors) – as depicted by the 45-degree line rising from a mid-point to the top right – have grown exponentially. Other sectors have declined – as shown by the other 45-degree declining line – and some have seen activity drop to zero.

While the idea to try and encapsulate the world’s largest economy in a single letter is too simplistic, so too is the debate about what will ‘fix’ the economy. Will a few intensely-negotiated tweaks in tax laws and social security really bring about a change in an economy that is anticipated to start building momentum from 80% of pre-pandemic levels? Or will the experience Biden brings in being able to get politicians to cross the floor secure more meaningful change?

In a nation that has shone with inventiveness and entrepreneurial spirit like few others, what is most needed now are words not often associated with financial markets: forgiveness and healing. If these two words do not find their way into the alphabet of possibilities, they have the ability to poison the entire soup and substantially hinder the country’s growth and potential. This in turn would result in lacklustre economic growth elsewhere in the world. While it’s not a great quote given the current pandemic, it continues to be true that ‘when the US sneezes, the world catches a cold’.

At Nedbank Private Wealth, we continue to keep a constant watch, seeking out opportunities to generate value for our clients’ portfolios, while remaining well positioned to meet clients’ long-term needs.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how goals-based investing can help their finances, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rate changes also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

about the author

Rebecca Cretney

Rebecca Cretney

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.

 

She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.

 

Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

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