Elections are Over – Washington Policy Changes Likely Positive for Economy in Near-Term

Democrats will control the White House, U.S. Senate and House of Representatives for at least the next two years following victories in Georgia’s Senate runoff elections. Although the Democratic majority is thin, a substantial portion of President-Elect Biden’s and the Democratic Party’s political agenda has the potential for implementation. We would not be surprised to see large-scale infrastructure, climate, healthcare, and COVID-19 related stimulus spending, along with regulatory and tax increases; however, management of the current COVID-19 crisis may also impose some limitations on just how much can be realistically accomplished in 2021. On balance, we expect a positive near-term impact to U.S. economic growth.

Additional stimulus and spending should support the economy and, in turn, corporate earnings (assuming some offset to potential tax increases) and stock prices. However, we remain cognizant of potential downside risks to the overall stock market’s valuation and stock prices. Aggressive government spending may result in an unexpected uptick in inflation, which could negatively impact stock valuation multiples. While overall stock prices may appear expensive, certain segments of the market may benefit from changes in Washington – and in some cases appear undervalued. For example, Industrial stocks exposed to infrastructure spending, Energy stocks exposed to clean energy, Healthcare stocks exposed to Medicare spending, and Consumer stocks exposed to stimulus spending may see renewed investor interest at the expense of large-cap Information Technology stocks, the stock market’s recent performance leaders that are susceptible to increased regulatory scrutiny.

Changes in Washington are also likely to impact interest rates. As mentioned, aggressive government spending may result in an unexpected uptick in inflation which would likely put upward pressure on long-term interest rates. Further, a sustained uptick in inflation could force the U.S. Federal Reserve to reverse its current monetary policy stance and begin a tightening cycle sooner than the market is expecting. Higher interest rates (yields) would negatively impact fixed income returns in the short-term, but eventually lead to more attractive fixed income investment opportunities.

In summary, an exhaustive analysis of the potential implications on the economy and financial markets resulting from Democratic control of the White House, U.S. Senate and House of Representatives is beyond the scope of this note; however, our expectation is that it is a net positive for economic growth in the near-term. Regardless of the politics in Washington, continued economic recovery and financial market stabilization will depend on the distribution and effectiveness of COVID-19 vaccines.

We encourage you to reach out to your investment team with any concerns or questions.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Past performance does not guarantee future results and the opinions presented cannot be viewed as an indicator of future performance. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with your Portfolio Manager, Financial Counselor, attorney or tax professional regarding your specific investment, legal or tax situation.