Does A Split Congress give us Visibility and Clarity?

Macro Perspectives: Fri 6 Nov 2020

Stocks are pricing in a Biden presidency, and a split Congress - looking like a goldilocks scenario for stocks. 

Maybe the best gauge of this, is how the 10-year yield is behaving. Coming into the election, as the odds makers were pricing in a "blue wave," interest rates started pricing in a hotter inflationary future (driven by big government spending/clean energy package).

With that, we had an aggressive move UP in interest rates. Now with the results of the past two days indicating a split Congress, yields have fallen back sharply.

A split Congress means an increase in corporate taxes and capital gains taxes becomes unlikely (at least until mid-term elections). It also means the big government spending package (i.e. funding for the clean energy transformation) becomes unlikely, with a Republican-led Senate.

Again, this is the "not too hot, not too cold" scenario: a continued economic recovery, while reducing the risk that the Fed will have to choke it off (at some point) to deal with a spike in inflation.

This scenario adds visibility and certainty. Stocks like both.

That said, this view on Congress may be changing. The Georgia Senate races, which have looked like wins for Republican incumbents, are now looking like they both may go to a run-off. That would entail another vote to take place on January 5 - clearly putting the prospects of a continued Republican-led Senate in the jeopardy.

That would put the "higher inflation" scenario back into focus (and would be a cue for lift off in the interest rate market).