Election 2020 Flash: Georgia on Our Minds

Editors’ Note: MarketMinder is intentionally non-partisan, favoring neither any party nor any politician. We assess political developments solely for their potential impact on stocks.

The counting continued Thursday, and investors didn’t get much new information. A widely anticipated update from Nevada in the morning didn’t add much to the state’s presidential totals, and other too-close-to-call states revealed little more. The Senate, however, came into a bit sharper focus, raising questions for anyone who bought into one bit of stock market trivia making the rounds this week. If, as the headlines suggest, stocks are rising because the combination of a Democratic president and split Congress is bullish, what happens if Congress isn’t split after all?

Officially, each party has now won 48 seats. Republicans are leading in Alaska and North Carolina, but both are too close to call and could flip as more absentee ballots arrive. But most eyes are on Georgia, where Republican David Perdue, though leading, has slipped under 50% of the vote. If that holds, he and Democrat John Ossoff will contest a January runoff. That puts both Georgia seats up for grabs then, as a runoff between Democrat Raphael Warnock and Republican Kelly Loeffler for retired Republican Johnny Isakson’s seat was already a foregone conclusion (that race was an all-party jungle primary). From our vantage point, the campaigning basically started today, and it wouldn’t shock us if these runoffs became the most expensive in the history of Senate races, as they basically determine which party controls the upper house when the 117^th Congress convenes in January.

Ordinarily, this wouldn’t be major news for investors, but a report hogging headlines this week says the best political outcome for stocks, historically, has been a Democratic president and split Congress. Much of the coverage of Wednesday and Thursday’s market movement highlighted markets’ alleged excitement over the supposedly high probability of this outcome. In our view, that thesis does a bit too much with too little data and defines gridlock too simplistically.

The claim rests on just four datapoints, all of which occurred during Barack Obama’s presidency. That is 4 years out of 95 years of reliable S&P 500 data. Folks, that is not significant, particularly when those four years occurred smack in the middle of history’s longest bull market. Stocks thrived from March 2009 through late February 2020 under a Democratic White House and Congress (2009 – 2010), Democratic President and split Congress (2011 – 2014), Democratic President and Republican Congress (2015 – 2016), Republican White House and Congress (2017 – 2018) and Republican White House and split Congress (2019). Trying to draw conclusions about which breakdown is best overemphasizes politics and ignores economic drivers, in our view.

Now, it is true that a split Congress generally implies gridlock, reducing legislative risk for stocks. But that isn’t always and everywhere true. George W. Bush had a fairly easy time getting Sarbanes-Oxley through a divided Congress in mid-2002, a bipartisan “achievement” that, in our view, renewed the bear market that began in early 2000. More relevant to today, structural (or interparty) gridlock isn’t the only flavor. There is also intraparty gridlock, where factions within the main parties battle internally, killing or watering down major legislation. We saw plenty of this within the Republican Party in Congress during President Trump’s first two years, causing 2017’s tax reform to be greatly watered down from initial expectations. Should former Vice President Joe Biden indeed win the presidency, and the Democrats keep the House and win those Georgia runoffs, their Senate majority would be slim—far too slim to push through radical legislation. As we wrote yesterday, there would be powerful incentive for Democratic Senators in swing states to pull legislation to the middle, lest they sink their own re-election chances.

Our overall take hasn’t changed since our initial post-election commentary. Any change emerging from Washington, DC next year, regardless of who eventually wins what, is likely minimal. However the dust settles, it will almost certainly reveal gridlock, which should give stocks one less thing to worry about.