Do investors really prefer a divided US government? To judge by the market’s response to the Georgia run-off elections, the answer seems to be “no”. A preference for political unity is understandable, if one side of a divided government consists of the sort of people who rampaged through Washington yesterday, causing the suspension of Congress and delaying the final confirmation of Joe Biden as US president and the final humiliation of Donald Trump as the ultimate sore loser (see After The Storming Of The Capitol). From a strictly financial standpoint, however, there are more important reasons than Trump’s shaming of American democracy for investors to welcome the Georgia results, which will put the Democrats in unified control of the presidency and both houses of Congress for the first time since 2010.
The week after November’s election, with Biden newly confirmed as the victor I argued that it made sense for equity investors to celebrate the incoming administration, especially since the size of Biden’s winning margin suggested that the Democrats could also win in Georgia and achieve Senate control (see Pricing The Post-Election World). I suggested three economic reasons for investors to welcome a unified Democratic government, in addition to the psychological relief of ending the embarrassing Trump psychodrama:
- The short-term certainty of much bigger fiscal stimulus, unimpeded by partisan gridlock.
- The medium-term probability that Keynesian stimulus would continue for at least the next two years, instead of succumbing to Republican sabotage ahead of the 2022 mid-term elections.
- The long-term possibility that economic growth would strengthen throughout the coming decade, because of a regime change in macroeconomic policy whereby Keynesian demand management permanently replaces monetarist inflation-targeting and an investment boom in clean energy ends the secular stagnation of the past 20 years.
