A Blue Ripple, not a Blue Wave A Blue Ripple, not a Blue Wave http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\leaf-floating-on-water-small.jpg January 7 2021 January 6 2021

A Blue Ripple, not a Blue Wave

With the slimmest of margins, Democrats will have to compromise.

Published January 6 2021
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The two Georgia runoff elections for U.S. Senate that gave Democrats control of both houses of Congress for the first time in 10 years saw cyclical value and small-cap stocks rally, tech and growth stocks lag and the 10-year Treasury yield jump above 1% for the first time since last March.

This is not a surprise. Tech and growth stocks are worried about President Joe Biden’s agenda that calls for higher corporate and capital gains taxes, and a firmer regulatory hand on Big Tech (though in fairness the Trump administration of late has been taking a similar tack). On the other hand, the incoming administration’s plans for bigger Covid stimulus and more spending on infrastructure and green technologies augurs well for economic growth, positives for cyclical and small-cap value stocks that tend to perform best in the early stages of expansion. Indeed, in early afternoon trading the day after Tuesday's election, the small-cap-oriented Russell 2000 Index and S&P 500 Energy, Financials, Industrials and Materials sectors were up sharply. In fixed income, the 10-year Treasury had risen more than 8 basis points to 1.04%, signaling it expects rates will drift higher on the potential for faster growth, more spending—and more issuance to fund it.

The bigger picture, however, really hasn’t changed that much. While they may have captured both chambers of Congress, the Democrats did so on razor-thin margins, losing at least 13 House seats vs. expectations they would add seats. The Senate is just a 50-50 split, with incoming Vice President Kamala Harris the deciding vote. And outgoing President Donald Trump received the second-most votes ever in a presidential election, a sign of his appeal to large segments of the country. Democrats ignore all of this at their own peril. This was a Blue Ripple, not a Blue Wave, with many Americans wishing for common ground. From our perspective, this suggests Joe Manchin, the moderate Democratic senator from West Virginia, may well replace current Majority Leader Mitch McConnell as the most important person in the Senate, if not in Washington. He becomes the key swing vote in the upper chamber and is on record as saying he doesn’t favor of eliminating the legislative filibuster, meaning Democrats would need a filibuster-proof 60 vote margin to pass most legislation (though it could still pass stimulus and tax changes with just a simple majority, though it’s far from clear moderate Dems such as Manchin would go along with the latter, particularly this year as the economy is still recovering from its brief but historically steep recession). In other words, the party will have to reach across the aisle to get big things done, a stance that Biden has said he would welcome. It appears that his wish is about to be tested.

Tags 2021 Outlook . Equity . Politics .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Growth stocks are typically more volatile than value stocks.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

Federated Global Investment Management Corp.