On Georgia

It appears both GOP Senate candidates in Georgia have lost to Democratic challengers, giving Democrats very narrow control of the Senate. Equities, due for a correction anyway, don’t seem as concerned this morning as we think they should be, given the risk that the 2018 corporate tax cuts will be repealed, reducing S&P 500 earnings by more than 12% and disincentivizing CAPEX. Higher Treasury yields and TIPS breakevens might imply expectations that free-spending Democrats will do lots of “stimulus,” but as recovery proceeds we were expecting a back-up anyway. We’ll have to wait for clues from Democrats about how they intend to use their powers. We will be watching most carefully for possible elimination of Senate filibuster rules, because that would be the gateway to aggressive anti-growth legislation. Even then, the Democratic agenda will be constrained by its narrow margins of control, and the upcoming 2022 elections in which reapportionment makes continued Democratic control of the House tenuous.