While the title sounds dramatic, what happens in Georgia on 5 January is critical to US policy over the next four years. Following the 3 November elections, it was looking like a divided government, with Joe Biden elected President and the Republicans holding the US Senate. But as the trickle in counting occurred in Georgia, it became evident that there will be runoff elections on 5 January for both Georgia Senate seats, after no candidate received the 50% majority mark required to avoid a runoff. This has paved the way for potential Democratic control of the Senate by the barest of majorities. A Republican sweep in Georgia would ensure a divided government and gridlock, with much of the Biden legislative agenda likely stalling in the Senate. However, a Democratic sweep would give the Democratic party control of the Senate. With a 50-50 split between Democrats and Republicans, Vice President Kamala Harris will have the tie-breaking vote. There is a third alternative that does not get the recognition it deserves: each party could pick up one seat. This could have a more nuanced effect on the Biden agenda, despite Republicans having nominal control of the Senate, given the presence of a small number of moderate Republicans. Currently, the markets are expecting a divided government. A Democratic win of both seats is not priced in: it will increase the odds of much easier fiscal policy, an infrastructure bill, a hike in corporate taxes and an expansion in Obamacare. This could inject some volatility to the current ‘Nirvana’ situation in financial markets and add a key risk to the markets going forward.
Asset Class Return Forecasts - Q2 2022