Quick Take: Georgia Runoff

JANUARY 6, 2021
At about 2 a.m. ET, the Associated Press declared Democrat Raphael Warnock the winner over Republican Sen. Kelly Loeffler. With 98% precincts reported, Democrat Jon Ossoff leads Republican Sen. David Perdue by a slim margin too close to call. Remember that a recount can be requested if the margin is less than 0.5%.

Today, we also have the certification of the electoral college vote by the US Senate. Vice President Mike Pence oversees the process, which is largely ceremonial in nature as envelopes from US states are opened and their vote total is counted. The electoral college votes are 306 to Biden and 232 to President Trump. It is expected that a group of 10 or more senators will object to the results. For the results of a state to be overturned by Congress, both bodies would need to come up with simple majorities to reject the state’s results.

Inauguration day is 13 days away.

Initial Market Reaction

The market looks to be pricing in a Democratic victory… here is what we are initially seeing.
– US Dollar is weakening
– Interest rates are jumping higher (and financials outperforming)
– Small caps (measured vis-à-vis the Russell 2000) look to outperform today
– Technology is a laggard

A Democratic sweep is implying higher stimulus, more support for the average consumer, and a tighter regulatory environment. Let’s also not forget the prospect of higher tax rates.

What Can Get Done?

A 50-50 split in the Senate will allow the Democrats to approve a party-line vote, with Vice President-Elect Kamala Harris to break any ties. That said, several moderate Democrats will have crucial votes that may limit the scope of the agenda, particularly any partisan agenda. The Democrats also have a slim House majority (222-210) after losing 9 seats in November. Democrats who are sitting in traditional Republican suburb seats will have a difficult time moving their agenda too far from the middle.

The scope of the Biden agenda will be slimmed down from what was stated on the campaign trail. Expect to hear more details now that the balance of power in the Senate has been cleared up. Here is a list of things to watch in the coming months. The devil will be in the details as sweeping change will be hard to pass given the narrow majority in both the Senate and House.

– 2021 stimulus package and size
– Key spending priorities in areas such as health care, clean energy, infrastructure, and child tax credits
– Key “Pay Fors” such as corporate tax increases, personal tax increases, and drug price reform

Tax Rates
We held a webinar with Andy Laperriere from Cornerstone Macro’s policy research team in December, where we discussed the implications of the Biden Tax Plan. Under the 50/50 split scenario, here were our key takeaways on taxes…

– Increasing top Federal income tax rate to 39.6% (from 37.0%).
– Increasing capital gains and dividend tax rates for top income tax bracket (range of 25% – 28%).
– Raising of the corporate tax rate, but not all the way to 28% like Biden has proposed. This may be phased in over time, beginning in 2022.
– Tightening loopholes for companies already paying a low tax rate, which particularly targets technology and health care.

We discussed potential changes to the estate tax, and Andy did not believe changes were coming. Note, the provision in the Tax Cuts and Jobs Act of 2017 will expire after 2025.

Yes, higher taxes would take some bite out of the operating leverage US companies may have realized when the economy is running at fuel steam. However, we believe many companies have significantly right-sized their cost structure due to COVID-19. And, more stimulus may get us back on stronger footing sooner than later.

On the fixed income front, the prospect of more stimulus is leading to higher bond yields. With respect to taxes, watch out for stronger performance from municipal bonds, who can provide investors with tax free income.

Who Saw This Coming?

Sentiment in the betting market took a hard turn towards the Democrats in the waning days. Not that betting markets have been pure prognosticators but this time the shift looks to back the results.

1. Source (includes ‘Vote Percentages in Georgia Runoff’): The Wall Street Journal, AP News, as of 9:30 am ET, January 6, 2021.
2. Source: Georgia.gov.
3. Source: AP News.
4. Source: The Wall Street Journal, “Electoral College Results to Be Contested by Group of GOP Senators”, January 2, 2021.
5. Source (Charts): Bloomberg.
6. Source: The Wall Street Journal.
7. Source: Bloomberg, PredictIt.

Disclosures
Investment Solutions at Hightower Advisors is a team of investment professionals registered with Hightower Securities, LLC, member FINRA/SIPC, & Hightower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through Hightower Securities, LLC and advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources; as such, neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates.