Investors hope this will lead to an agreement on a Covid-19 stimulus project, although perhaps less than the $ 1.9 trillion package that Biden has proposed. And for those who feared that a more decisive blue wave would lead Biden to adopt more progressive policies, they can breathe a little better now.
The stimulus is likely to take precedence over tax increases, changes in healthcare policy and more regulation over banks and large technology companies. In other words, the Elizabeth Warren / Bernie Sanders wing of the party will have to wait its turn.
“A $ 1.9 trillion stimulus package may not be easy to approve, but something will be done,” said James Ragan, director of wealth management research at DA Davidson.
“As for taxes, they may eventually go up on the corporate side, but that will happen in the future.” This is not the first order of business and investors are reacting positively to this.
Investors were gearing up for a much bigger victory for Democrats, which could have given Biden room to maneuver to launch a much more progressive agenda. This seems unlikely now, and not just because of Covid-19: experts say Democrats need to act carefully to maintain control of Congress in the 2022 midterm elections.
“The market is now pricing less of a blue wave when it comes to politics than it was before the election,” said Kent Insley, chief investment officer at Tiedemann Advisors.
“There are concerns that if Democrats push for very aggressive changes, they could suffer, and that would increase the risk of not being re-elected. Moderate Democrats may try to limit tax increases,” he added.
Stricter regulation requests may fall on deaf ears
Democrats may also have to stop any efforts to impose stricter regulations on big banks. This may be good news for the stocks of major financial companies.
“I don’t foresee any powerful regulatory changes coming from Democrats,” said Steven Leslie, chief financial services analyst at The Economist Intelligence Unit. “The Biden government will not want to restrict banks beyond policing abuses. They have other priorities.”
That view is shared by a former Wall Street banker who served briefly in the Trump administration.
The fact that Biden will need to commit to Republicans could be a problem for the economy, although investors are rooting for his willingness to get to the other side of the altar.
“The markets are, unconsciously or not, betting that the US fiscal package will be diluted by moderates,” wrote Kit Juckes, macro strategist at Societe Generale, in a report, “which remain powerful thanks to the Democratic Party’s thinness over Congress. . ”