A predicted double win for Democrat Senate candidates in Georgia hit large-cap tech stocks on Wednesday as the party cinches control of both chambers of US Congress alongside the presidency.
Technically, the seats secured by Raphael Warnock (pictured) and Jon Ossoff divide the Senate 50-50 between the Democrats and Republicans but Vice President elect Kamala Harris will have a deciding vote. That slim majority will allow Democrats to pass fiscal policies without bipartisan support, but 60 votes are needed for legislation on issues like infrastructure, minimum wage, tech regulation and environmental policies.
The tech-heavy Nasdaq was down 0.36% in early trading but later slipped into positive territory, while most other major world markets had a positive day of trading.
In the US, the Dow Jones rose 1.6% on Wednesday morning, while the FTSE 100 finished the day up 3.5% and the FTSE 250 rallied 1.2%.
In bond markets, US 10-year Treasury yields surpassed 1% for the first time in nine months in anticipation of even more fiscal stimulus than what had already been priced in when Joe Biden took the US presidency in November.
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Georgia delivers fiscal stimulus and reflation
“Markets overwhelmingly see this result as being a driver of yet more fiscal policy support for the virus-ravaged US economy,” says Aberdeen Standard Investments investment director James Athey. “This is likely to pressure Treasury yields higher, particularly in longer tenors, as yields will have to reflect higher growth expectations and greater supply of Treasuries all else equal.”
Goldman Sachs said in an analyst note that it had pencilled in an additional $600bn of fiscal stimulus in the near term on the back of the Georgia result – equivalent to 2.7% of GDP.
Athey adds that the double win from Warnock and Ossoff gives further legs to the reflation trade.
“When taken in the context of a Federal Reserve that is seemingly willing to embrace the new-found latitude afforded to it by the move to a flexible inflation target, we feel there is scope for the inflation market to continue to anticipate additional pricing pressures in the medium to long term,” he says.
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Tech takes a further hit after Covid-19 vaccine delivered sector rotation
Large-cap US tech stocks were seen to be among the biggest losers after voters delivered the Democrats a Senate majority with Facebook, Alphabet and Amazon all down on Wednesday morning.
“Higher corporate, capital gains and income taxes will all be seen as potential negatives for the equity market as will a more onerous regulatory environment,” Athey says. “More robust antitrust regulation and enforcement have the potential to suck the wind out of Big Tech’s sails at a time where valuations there already look increasingly hard to justify.”
Athey adds this comes at a time when there is already a prolonged rotation out of so-called Covid winners into Covid losers.
Willis Owen head of personal investing Adrian Lowcock reckons the vaccine is the most important driver of markets heading into 2021, noting antitrust policy would take years to hamper tech company profits.
“As [the vaccine rollouts] are progressed and fiscal stimulus programmes are enacted then we’ll see a greater rotation into recovery stocks and cyclicals with some profit taking from tech stocks, which really were one of the few places to invest in 2020,” Lowcock says.
He names JPM US Equity Income, run by Clare Hart, as a fund pick to tap into the Democrat trifecta of the presidency, Congress and Senate. He says Hart looks for quality businesses with durable franchises, consistent earnings and high returns on capital as well as capital preservation and is well positioned for the recovery with exposure to financials, pharma and industrials.
See also: JPMAM’s Clare Hart nabs top prize at Morningstar fund manager awards
The huge opportunity for sustainable US companies
By contrast, greener sections of the economy and infrastructure were poised to be the winners of the Georgia result, according to Quilter Investors portfolio manager Stuart Clark.
Biden was already planning to take the US back into the Paris climate agreement as one of the first acts of his presidency when he is inaugurated later this month. But Senate control will ease his plans to spend $2trn over his four-year term on the green energy revolution and to introduce tax incentives to encourage the adoption of electric vehicles, including funding for over 500,000 new EV charging stations.
M&G Climate Solutions fund manager Randeep Somel describes the Senate win as a huge opportunity for climate-focused sustainability companies “as the full force of the US government gets behind net zero”.
“Biden has consistently expressed his dismay that it is China rather than the US is leading the world in green technology, especially in electric vehicles,” Somel says. “Hopefully the next East-West arms race will be to see who can develop an economy best equipped to reach net zero.”
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