Wednesday’s Washington DC Wisdom — December 2, 2020

By Hightower St. Louis on December 3, 2020

Several closely contested states have certified election results at the local level, such as Georgia on November 20th and most recently Arizona and Wisconsin on November 30th.¹ Stimulus discussions remain alive, with the Washington Post reporting a group of bi-partisan Senators preparing a $908 billion dollar package to extend unemployment benefits, small business aid, and state/local government funding.² We continue to receive piecemeal announcements on President-Elect Joe Biden’s cabinet members. We will dive back into the Georgia Senate runoff and the implications based on what we know of Biden’s cabinet nominees.More Cabinet, More Georgia, More Stimulus

Economic Policy Nominees

Last week, Janet Yellen was announced as Mr. Biden’s nominee for Secretary of the Treasury. If confirmed, she would be the first female to lead the Treasury Department and she is a known face to markets following her tenure as Fed Chair from 2014 to 2018. Two additional announcements were made public at the end of November – Neera Tanden for Director of the Office of Management and Budget, and Adewale “Wally” Adeyemo for Deputy Secretary of the Treasury. More announcements are expected this week.

The views of the economic team will be important to gauge where economic policy is going. According to the Wall Street Journal, “many members of the [economic] team have played down concerns about budget deficits […] arguing that now isn’t the time for policy makers to worry about rising deficits and debt, and that the risks of doing too little to support the economy are far greater than the risks of borrowing and spending too much.”

With continuing jobless claims still above 6 million in the US, we continue to expect some form of stimulus. Recall that in 2009 jobless claims peaked at 6.6 million and the cost of government borrowing is much lower today.⁴ The size of the deal will likely hinge on the outcome of the Senate, which will be decided by the Georgia runoffs for the final two Senate seats.

Stimulus Package Hinges on Georgia

In mid-October, we published a chart of the proposed stimulus packages from the Democratic majority-led House and the Republican majority-led Senate.⁵ With the initial Biden nominees in the large stimulus camp, we would not anticipate the Democrats walk off the $2 trillion-plus ask unless they are absolutely forced to. A deal in the lame-duck session of Congress would only be a precursor to another package sought by the Democrats once Biden is sworn in. With that in mind, the line in the sand will be drawn following the Georgia runoff election.

The Republicans still remain the odds-on favorite to retain control of the Senate, needing to win only one of the two open seats.⁶ The runoff election takes place on January 5th.

Historical context provides another check in the Republicans column. Georgia has had two Senate runoff races in the last 30 years, one in 1992 and the other in 2008. In both instances, voter turnout was decisively in favor of the Republicans. And in both instances, the elected President that November was a Democrat.⁷

Additional Market Implications

The outcome of the Senate will have a more pronounced impact on various industries. See below for a short list of beneficiaries based on the outcome. A Democratic Senate would have the short-term positive of more stimulus, partly offset by longer-term headwinds of more regulation and tax increases on corporates and/or individuals.

Any appreciable rise in the VIX Index in December is one signal the market may be concerned about volatility driven from the runoff election. The VIX Index peaked at 40 on October 28th. On December 1st, the Index hovered near 20, a level not realized since mid-February 2020.⁸

Please reach out to us if you have any questions or comments.

Hightower Wealth Management

Stephanie Link, Chief Investment Officer

Joseph Klein, Portfolio Manager

SOURCES

1. Bloomberg, “Arizona and Wisconsin Confirm Biden’s Victories Over Trump”, November 30, 2020.

   Strategas Research, “2020 Election Wrap”, November 9, 2020.

2. The Washington Post, “Bipartisan group of senators prepares $908 billion stimulus plan, aiming to break partisan logjam”, December 1, 2020.

3. Bloomberg, NPR.org.

4. (Jobless Claims & US 10-year Charts): Bloomberg.

5. The Wall Street Journal, “White House Draws Up New $1.8 Trillion Virus-Relief Proposal”, October 9, 2020. The Wall Street Journal, “GOP Releases Coronavirus Relief Proposal After Delay”, July 27, 2020.

6. Bloomberg, PredictIt.

7. 270towin.com, Strategas Research, Real Clear Politics.

8. Bloomberg.

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