It wasn’t quite a Blue Wave, but the Democrats will control Washington after all—and the market is giving an early vote of approval.


In a surprising turn of events, Democrats Raphael Warnock and Jon Ossoff defeated their Republican opponents in Georgia’s runoff elections for Senate on Jan. 5. That means the Democrats, with 50 of the Senate’s 100 seats, will effectively control the chamber with Vice President Kamala Harris holding the tiebreaking vote.


After winning the presidency and holding the House of Representatives in November, the Democrats are in full control of the legislative agenda for the first time since 2011. The major stock market indexes are signaling enthusiasm. Six days after the Georgia election, the S&P 500 and the Dow Industrials were both up 2%. The Nasdaq index of technology stocks closed down 0.6% the day after the election on fears of tougher regulation. But five days later, swept up in the euphoria, it was up as well, by a total of 3%.


Investors expect a blue Washington to mean more stimulus spending and higher taxes. And while many on Wall Street had feared the prospect of higher corporate and household taxes, it appears that investors see the trillions of dollars in stimulus money sought by Biden as outweighing the potential tax hikes. They also see Washington taking up stimulus legislation before turning to tax legislation.


While markets have been rising in unison so far, I believe the best approach going forward will be to buy stocks of individual companies based on both their long-term prospects and their ability to weather the turmoil we’re likely to see in coming months. More than 250,000 new Covid-19 cases are now being reported daily, up 37% from two weeks earlier; average daily deaths are up 48% over the same period. 


While the distribution of the highly effective vaccines is good news, the rollout has been disappointing. At the current rate, it will take an estimated three years to achieve so-called herd immunity, depriving the virus of new hosts and effectively shutting it down. Thus, I expect a continuing health crisis, with the possibility of widescale business shutdowns, in the months to come. The market may be highly volatile as events unfold on both the pandemic and legislation fronts. 


Investors who bought up stocks in anticipation of the government spending may “sell the news” once the legislative agenda turns to taxes. In part to pay for support to households, small businesses and local governments, Biden wants to raise income taxes on households earning more than $400,000 a year, to hike capital gains tax rates and to increase corporate tax rates.


You can bet that the markets won’t like that part of the Democrats’ agenda as much as they like the stimulus. The key then will be knowing what to buy and when to buy it. If you’d like to discuss your investments, please don’t hesitate to get in touch.