Market performance in the wake of the US election has been overwhelmingly positive, with Australian and US shares up 11% in November, Japanese shares up 16% and Eurozone shares up 17%. It’s somewhat of an ironic note, given Donald Trump’s fondness to cite stock market strength as indicators of his own economic success, and yet it’s gone up on news of his election loss.

There are a few aspects of Joe Biden’s victory that will have implications for markets, with a number of them actually hanging on the result of two Senate runoff elections in Georgia on 5 January 2021, a little over two weeks before Biden takes office.

In contrast to the practice in most other states, where the winner of the Democratic and Republican Senate primaries face off in the general election, Georgia allows for multiple candidates from each party to contest the general election, with runoffs between the top two candidates if no candidate receives a majority of votes.

Although polls are close with Democrats slightly ahead in some polls, betting odds still favour the Republicans for at least one of the seats. If the Democrats win both seats they would secure a narrow majority in the Senate by virtue of Vice President-elect Kamala Harris’ casting vote, but just one seat would leave them short. Here’s how the dynamics might play out in major policy areas:

Fiscal stimulus

Biden has indicated his desire to have the stimulus package passed before he comes into office, which gives cover for House Speaker Nancy Pelosi to negotiate down from her original $2.4 billion package. A bi-partisan group of Senators has proposed a more modest package at less than half that cost and were the Democrats to control the Senate in 2021, another package might be considered further down the track.

Trade

A new presidency offers a chance to reset trade relationships across the world and at the moment there is none more critical than the relationship with China. A different approach under a Biden presidency would give both countries the chance to reconsider the less-productive parts of recent arrangements, such as tariffs¹ and China’s undertakings to buy more American goods, where they are currently running behind². An immediate reset might not be forthcoming – after all, both sides will want to maintain their negotiating positions, but Biden will give both sides an opportunity to come back to the table – and this will hopefully encourage China and Australia to talk their problems through too.

The US attitude to its traditional trade partners also offers opportunity, especially if the Biden administration seeks to re-enter the reformed Trans-Pacific Partnership or construct an equivalent arrangement within the region. Regardless, a renewed commitment from the US to multilateralism and the rules-based order is positive news for international trade.

Tax policy

In the somewhat unlikely event that the Democrats win both Georgia Senate runoffs, the full program of Biden’s tax increases for corporations and high-income individuals will be on the table, although winning the support of moderate “Blue Dog” Democrats for tax hikes is not necessarily a given.

But even in the event that the Democrats do control the senate, and these tax hikes are passed, I think the market will probably end up looking through it, which speaks to confidence in a presidency that will take a more stable and expert-based approach to policy. This will particularly be the case if tax hikes are combined with more stimulus.

Nowhere will this be more valuable than in regard to the scientific approach to controlling the COVID-19 pandemic. While vaccines are on the horizon it will take some time to administer a program across the population and in the meantime, the country is in the midst of its third wave, with emergency departments across the country at or nearing capacity.

There are likely to be ongoing economic effects while the virus continues to spread in such an uncontrolled fashion, and the path to recovery may well hinge on how well the US can start to contain the pandemic as the vaccine program is rolled out. From this point of view at least, there appears to be market confidence that a Biden Presidency will offer a more conventional and predictable path to virus containment and economic revival.

¹https://www.washingtonpost.com/outlook/2020/12/04/trump-biden-china-tariffs-trade-interview/
²https://www.cnbc.com/2020/08/13/chinas-progress-in-buying-us-goods-under-phase-one-trade-deal-in-charts.html