Of all of the remarkable things to emerge in the US political scene, one of the most amazing has been the two seat Democrat Senate victory in Georgia.
While the literal wrecking ball riots at the Capitol building and the Twitter ban on outgoing President Donald Trump might appear to be more spectacular news, it is the tenuous hold on the numbers in the US Senate that will still be producing changes in four years’ time.
Financial markets have had a lot of changes to adjust to since the hotly contested election with the usual period of peaceful transition to a new President instead replaced by a period of intense speculation and rivalry as outgoing President Trump refused to depart quietly, leaving incoming President Joe Biden in an unprecedented position.
Biden gets the last laugh
However, President-elect Biden now looks set to have the last laugh after the controversy unexpectedly saw the Democrats gain control of the Senate.
Initially markets were looking at what appeared to be a “Goldilocks” result – a Democrat executive branch with a Republican-controlled Senate able to keep things like big tax rises and spending measures in check.
Now markets are adjusting to more expansionary policies, with incoming President Biden already flagging a spending boost increasing the next COVID-19 stimulus cheque from US$600 to US$2,000.
Bond yields on the rise
That has already sent US 10-year bond yields back above 1% for the first time since March last year but share markets seem to have taken the news in their stride, seeing the extra spending as a positive.
What many market participants have noticed though, is that there is the beginnings of a switch from the theme of the past few years of backing high growth technology stocks and simply running with the momentum to taking more care to ensure share buys are more supported by fundamental value.
Beaten down stocks bouncing back
That has helped to support reflating resources and oil stocks and also financial stocks, although technology stocks remain on stellar multiples – at least for now.
Bigger budget deficits and higher infrastructure spending combined with hopefully a vaccine-led recovery from the pandemic should be highly stimulatory for the economy as a whole with the possible concern being that inflation might make a comeback at some time.
Direct payments in the form of COVID-19 stimulus cheques certainly have the capacity to revive the inflation dragon, as do rising long term yields.
The switch to value investing could produce some high-profile casualties, with more of a focus on short term earnings and less on stocks with ultra-high multiples that are relying on massive growth in earnings way down the track.