In 2020, the big winners of the stock market were the tech companies along with the renewable sector. Large caps performed much better than small caps and America did much better than Europe.
The first big event for the markets this year has been the Senate election in Georgia. It had vital importance as this state decided the majority in the Senate.
Democrats won and they are going to control the three big powers in America: Senate, Congress and White House.
As a result of this, potentially, Congress will deliver a bigger emergency aid package now than in the case of a divided government. Apart from that, Democrats will be able to implement its plan without the restrictions derived from split powers. It entails a large amount of public investment that it is expected to boost the economy. As a consequence, the chances for inflation are higher now than with a divided Senate. Democrats will also be able to fulfil its plan and increase taxes for the large corporations.
What does the Blue Wave mean for the markets?
On paper, the politics that Democrats are going to implement should have the following effects on the markets.
Nasdaq has been the winner of 2020. The higher regulation and taxes for larger companies as long as a natural rotation to other sectors, meaning that it is difficult for the Nasdaq to repeat its last year performance.
Another potential loser would be the USD. As the higher number of stimulus expected under the Democrats mandate should depreciate the greenback over the basket of currencies.
As a consequence of printing more dollars. Investors would look for refuge on Gold. We have witnessed this since the beginning of the Covid-19. It is expected to continue happening as long as FED continue printing money. The grade what gold will go up will also depend on the stock markets, as gold also acts as a refuge for bear markets. If stocks markets go up a lot, the rise in the ounce of gold would be more limited
Following the same argument for gold. We expect Cryptocurrencies to go up. By Crypto, we do not mean Bitcoin only but the basket of cryptocurrencies. We are very favourable to Ethereum and other small cryptos.
Blue Wave impact in different sectors
Higher inflation expectations, as a result of a bigger aid-package, would make Bonds to go up. This could also favourable for the depressed banking sector.
One sector that it is expected to be highly benefited by the Blue wave is the also depressed cyclical sector, which would rise. This would be the result of two factors: the rotation from the highly profitable tech sector (2020) and the bigger expenditure to be made by the government in the coming years.
Maybe one of the most beneficiaries is the Renewable sector. Democrats want to fund the Green New Deal. And it will result in millions of dollars pouring in this sector in the coming years.
Small caps are also expected to perform better as a result of the plans that the Biden administration has for a higher infrastructure spending legislation. It should launch the smaller components of the economy, represented in the Russell 2000-3000
Emerging Markets have suffered the consequences of Covid-19 more than developed ones, as well as their currencies. The vaccine was the start of the turnaround. This comeback should be fuelled by the weakness of the dollar. As well as commodities, another big winner from this dollar weakness.
Investors are also likely to favour value-oriented investments that have lagged in performance compared to the tech-centric, growth stocks that populate the Nasdaq.
This is only our understanding about what we can expect for markets, as a consequence of the Blue Wave in the coming months. We bet for a continuation of the movements started by the news of the vaccines. That means small-caps stocks and Value.
Note: This is not investment advice.