In the 2021 Outlook, I discussed the coming run-off election for the two Georgia Senate seats. In the outlook, I said equity markets tend to do better under a divided government than when one party controls both houses of Congress. Equity markets seem to be proceeding under the assumption that Republicans will retain control of the Senate, and we will continue with a divided government. I've had a couple of questions asking how the economy and markets would respond if Democrats took control of the Senate.
The nation continues to be divided across political and ideological lines. Everything seems to be seen through a partisan lens. However, the Senate is considered to be a more deliberative and moderate legislative body. Currently, Republicans hold 50 of the 100 Senate seats, Democrats 48, and the remaining two will be decided by a run-off election to be held on January 5th. Were Democrats to win both of the run-off elections, they would gain control of the Senate when Vice-President Elect Kamala Harris takes office. The Vice-President serves as the President of the Senate and may vote to break a tie. Some are assuming that if Democrats win control of the Senate, we could expect a radical change in tax policy and other government regulations. There are rumors that Democrats will move to expand the number of Justices on the Supreme Court and add left-leaning justices. There are rumors that Democrats will seek to end the filibuster, minimizing legislative debate.
Unlike the House of Representatives, Senators don't always vote along party lines. On November 9th, 2020, Sen. Joe Manchin (D-WV) posted his comments from a Fox News interview on his Twitter account; "Let me be clear: I will not vote to pack the courts & I will not vote to end the filibuster. The U.S. Senate is the most deliberative body in the world. It was made so that we work together in a bipartisan way. If you get rid of the filibuster, there's no reason to have a Senate."
Govtrack.us gives legislators an Ideology Score based on bills that they sponsor, co-sponsors, and voting records. The score can be used as a left-right scale. The 2019 Score Card ranked Sen. Kyrsten Sinema (D-AZ) as the most conservative Democrat in the Senate, more conservative than both Sen. Rand Paul [R-KY] and Majority Leader Sen. Mitch McConnell [R-KY].
If Democrats take control of the Senate, markets may have a short period of volatility as market participants reposition some investments. But I do not believe it would necessarily signal a radical legislative agenda.