If early results in Georgia’s Senate run-off elections are confirmed, the Democrats will gain effective control of the US Senate, giving them a solid platform for implementing their legislative programme. Financial markets will likely focus on the prospects of more fiscal stimulus in the US in the short term, and higher taxes later on. Beyond fiscal policy, investor attention will now shift towards other areas of the Democrat policy agenda such as infrastructure spending, minimum wage increases and greater regulatory intervention across key industries.

Investors will now be dusting off the blue wave playbook that many toyed with in the run up to the election in November 2020. Still, given that implementing legislation in many of the areas will still require 60 votes to pass in the Senate, it seems right to expect a ‘light blue’ version of the Democrat policy programme, rather than the most radical version.

A clean sweep for the Democrats in Georgia should lift expectations for US growth, with fairly obvious consequences for bond yields. For equities, the implications are more complicated, with anticipated GDP gains being somewhat offset by the prospect of higher taxes and greater regulatory intrusion. In broad terms, value stocks and cyclicals should be boosted relative to growth stocks, momentum stocks and many of the winners of the coronavirus era.

Paradoxically, what looks like good news for the US economy is probably bad news for the relative performance of US stocks. That is because the prospect of higher corporate taxes, higher bond yields and concerns about regulatory intrusion will weigh most heavily on the media, technology and communications behemoths that dominate US indices. US stocks have been quietly underperforming global market since last August. We would expect a Democrat clean sweep to extend this trend, favouring a rotation from US stocks towards emerging markets and Europe.

While on days like this, it is quite a relief to focus on something other than the coronavirus, we have to remember that it is nevertheless likely to remain the dominant driver of world markets for many months to come. Once the dust settles on the election result, attention will inevitably be drawn back to developments on the health front. The speed of the spread of the new variant of the coronavirus through the UK in recent weeks remains quite disturbing. While, so far, this variant has only been detected in small numbers outside the British Isles, any evidence that it is gaining momentum in other countries would be an ominous development, which could quickly overwhelm the market consequences of the Senate vote.