Happy 2021! Hope everyone is doing well and your year is off to a good start. Here is your first update of the New Year. The stock market saw a strong start to the year globally, with major indexes hitting fresh record highs last week. Small-cap and international stocks outperformed, signaling optimism around the outlook for the post-vaccine phase. I have broken down this week’s news using quotes from the 1996 Tim Burton movie Mars Attacks!
“I want the people to know that they still have 2 out of 3 branches of the government working for them, and that ain't bad.” President James Dale (Jack Nicholson)
The outcome of the Georgia runoff elections this week produced a 50/50 split between Republican and Democratic Senate seats, resulting in Democratic control of 2 of the 3 branches (the White House and Congress). Democrats secured the Senate majority following a pair of narrow runoff victories in Georgia, potentially paving the way for more fiscal stimulus later in the year to aid the recovery. Democrat control also raises the prospects of higher corporate tax rates but considering the razor-thin majority and current state of the economy, tax reform might not be a priority in 2021. It does clear some hurdles for the new administration as it pursues its agenda, which includes a higher corporate tax rate and increased taxes on high earners. While corporate tax hikes would put a dent in upcoming earnings growth, it's not a foregone conclusion that this will occur immediately. Markets clearly seem to believe the administration will be somewhat sensitive to the fragility of the current pandemic economy, which could delay any such changes. Moreover, expect some of the gridlock in Washington to continue, which should limit sweeping, unimpeded legislation relative to the proposals outlined during the campaign. The Biden administration will most immediately focus on fiscal stimulus in the form of increased aid for households ($2,000 checks coming?) and increased government spending this year (including a potential infrastructure bill). While this will add to the government debt tab, it will also offer a boost to the economy this year.
“We know they're extremely advanced technologically, which suggests - very rightfully so - that they're peaceful. An advanced civilization, by definition, is not barbaric.” Professor Donald Kessler (Pierce Brosnan)
Riots in DC. Lawmakers in D.C. certified the election. However, the certification process, which was largely thought to be ceremonial, was disrupted yesterday when insurrectionists breached the Capitol building and forced it to go into lockdown with the nation's lawmakers locked inside. Despite a dark day in American history Wednesday, stocks soared. While it's still not clear why it was possible for the rioters to breach Capitol security to get inside of the building, order was eventually restored. Capitol Police, alongside Secret Service and D.C.'s National Guard, were able to clear the building of the insurrectionists which allowed lawmakers to resume the certification process late Wednesday night. Following the certification of the election, President Trump released a statement in which he vowed for an "orderly transition" when Biden is inaugurated on Jan. 20. Trump pledging order removed a risk and the markets were able to continue their move higher.
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