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10 November 2020

The Senate vs The President

Could the outcomes for the markets have been much better?
 
The United States Federal Government is divided into three branches, the judicial branch, legislative branch, and the executive branch. This aims to limit the power of each individual branch to ensure that the American political system runs in the interests of the US citizens. However, issues arise from this system, particularly due to the clashing political parties within the government and the effects this will have on Joe Biden’s ability to pass legislative changes. A gridlocked government refers to the President’s party differing from the majority party within the Senate, which is likely to make it increasingly difficult for Biden to push through his policy ideals.

The race for the Senate is still unclear, but the Republican party is in control of 48 seats compared to the 46 seats of the Democratic party. If the Republican party maintains this majority, it is likely that Biden will not succeed in passing significant legislation, such as large-scale tax increases, green policies, and healthcare amendments.

The policies of Biden are much greener compared to those of Donald Trump. Biden announced a US$2tn plan to combat climate change and to invest in clean energy. One major reversal which Biden wishes to enact is to re-join the Paris Climate Agreement, which includes around 200 countries pledging to reduce carbon emissions. As it was a Trump characteristic to be against clean energy etc. and not an opinion held that strongly by the Republican party as a whole, we feel that this direction will continue to aid ESG-centric investments and strategies, particularly in clean energy.

There are additional market advantages to a gridlock within the US government. By restricting new legislation being written, this reduces uncertainty for many industries. For example, Biden has threatened antitrust laws upon technology firms, so ideally with a divided government, such policies may be restricted. In addition, Biden aims to raise corporation tax from 21% to 28% and has proposed a minimum federal tax aimed at companies such as Amazon. All of which would create more downside for the tech giants which dominate the weightings of the S&P 500, so we can only see the gridlock as a positive for this industry also. Overall, we expect this divided government to reduce market uncertainty and to push returns across many industries higher in the short to medium term.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
The Senate vs The President
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