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The victorious "blue wave" of Democrats has the potential to stir markets

With the upcoming elections, markets are becoming increasingly skeptical about the possibility of a "total" victory for the Democratic Party. Joe Biden's preferences are growing in preliminary polls, and investors are beginning to prepare for a "blue wave" a scenario, in which the party would gain control of both the White House and the Senate. That should help markets as Biden pushes for a fresh fiscal stimulus, but analysts believe the Senate will be eventually won over by the Republican Party, which could hold back the stimulus.

 

Battle of the Senate

Stock markets are doing well in October so far, despite the fact that this is historically one of the most volatile months ever. If we add the upcoming elections, it is theoretically set for an interesting rest of the month. Democratic Party candidate Joe Biden's preferences are slightly growing with each day, and many investors estimate that Democrats could take over the Senate as well. However, some analysts expect Republicans to eventually hold the Senate, which would be bad news for stock markets as Republicans push for a smaller fiscal package.

 

Graph: Democrats could have a majority of 52 seats in the Senate, Republicans 48 (Source: https://projects.economist.com/)

 

Higher taxes

However, the bad news for the markets in the short term would also be Joe Biden's victory in the presidential election. The reason is the expected increase in taxes on capital gains, from the beginning of 2022. It was Donald Trump who came up with tax reform at the end of 2017. Under Biden's government, the capital duty could rise from 23.8% to a maximum of 39.6%, but the impact on market developments would not seem to last too long. Markets are already counting on a similar outcome and currently do not appreciate the victory of the "blue wave", which will also take control of the Senate and enforce the greatest possible fiscal stimulus. To finance it, however, it will need to increase revenue to the state coffers by raising taxes.

 

Just a short stumble

If the “blue wave” does win, markets can be expected to be more nervous by the end of next year, as inflationary pressures begin to rise as the economy starts, causing massive fiscal and monetary stimulus. The Fed would have to start tightening monetary policy at that moment. However, any selling pressure would not seem to last too long. Once higher taxes come into force, markets will begin to resume growth. As was the case in 1987 and 2013, when capital taxes rose. In the long run, this should not be an intervention that would force investors to reconsider their view of the capital markets. In the short term, however, pressure may come, as some companies will, for example, have to limit the return on stocks or investments.

 

Graph: Biden's lead rises to 52% (Source: bbc.com)

 

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