A week ago “the market” https://themarket.ch/the-big-picture/praesident-biden-und-ein-republikanischer-senat-ld.3015 outlined the four options might seem like the party constellation in Washington look like. They came to the conclusion that virtually every scenario would be positive for the stock markets, with one exception: if Biden becomes president, but the Senate remains in Republican hands.
But exactly this scenario should now occur. As mentioned, some things are still unclear – there will be by-elections for the Senate in Georgia in early January – but the likelihood is actually high that the next two years will be shaped by Gridlock if Biden has to work with a Republican-controlled Senate.
Is that actually a disadvantage for the stock markets, or does the previous assessment turn out to be wrong?
A positive scenario for the gridlock is also emerging in the markets, and it looks something like this:
- Biden and Senate Majority Leader Mitch McConnell have known each other for decades. They know they need to find a way to work together. Because cabinet positions have to be confirmed by the Senate, Biden cannot nominate anyone classified as “extreme left”. This means, for example, that Elizabeth Warren cannot become Treasury Secretary.
- The increases in taxes on corporate profits and private capital gains announced by Biden have no chance in a Republican Senate.
- Even the Green New Deal promised by Biden will not get past McConnell.
- However, Biden and McConnell could meet for a kind of grand bargain: Biden waives tax increases, but McConnell extends his hand for a fiscal policy support package to cushion the Covid crisis and then perhaps even for a larger infrastructure program.
- Biden will continue to take a hard line against China, but he will not let the trade war – which was economically ineffective for the US and was just a show by Trump for his base – escalate.
As per the blog Of course, all of this is still hypothetical, but this narrative – and after all, the markets live from narratives – would give investors the best of both worlds: Biden would rule as center president, the left wing of his party would not come into the cabinet. He cannot raise taxes, but he does bring a substantial stimulus package through the Senate.
At the same time – Fed Chairman Jerome Powell made this clear yesterday, Thursday – the US Federal Reserve will remain extremely expansionary and will not tighten monetary policy for years to come.
So all in all, a narrative that the markets could enjoy.