Rather than focus on the whether the outcome of the US presidential election can still be contested, the financial markets should be concerned with the Senate run-off elections in Georgia on 5 Jan. 2021, says US policy strategist Greg Valliere.

By winning both of the seats that are up for grabs, Democrats could take control of the Senate in addition to the House of Representatives.

“That’s a big deal, a major development for the financial markets, because investors, I think, are concerned if the Democrats do take the Senate, there would be a lot of new taxes under President Joe Biden,” Valliere said at the virtual RF Investor Forum on 3 Dec.

The chief US policy strategist for Canadian financial firm AGF Investments pointed to Biden’s tax plans, which could include higher taxes on some individuals, higher taxes on business, a new minimum corporate tax, higher taxes on estates, higher taxes on Wall Street transactions, higher social security taxes and higher capital gains taxes.

“The list goes on and on about the tax increases that the Biden administration would try to obtain, if they control the Senate,” he said. “So that, in my opinion, is a big story that will dominate the first part of 2021.”

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Valliere said there is always a risk that the left-wing of the Democratic Party will put enormous pressure on Biden to change the Supreme Court, spend huge amounts of money on a Green New Deal and spend much more money on healthcare.

He believes that Biden is not inclined to do any of this to the extent that the Progressives would like to see. But President Biden would tighten regulations in a reversal of the Trump administration’s actions during the past four years.

Investors therefore should pay attention to a number of regulatory changes.

Valliere said, “First of all, I think that fossil fuels – coal, oil, natural gas – will not get one extra penny from Washington.”

Alternative energy like wind and solar, on the other hand, might benefit from the new political climate.

In the healthcare sector, Valliere noted a bipartisan desire to curb drug pricing and cost, which will put pressure on pharma companies and insurers. However, hospitals could expect to get more funding.

For the financial services sector, it will be “a slightly more aggressive climate”, he said. “But I think it’s one that the industry, frankly, can live with.”

The enormous amounts of money spent on the defense industry in the last for years under Donald Trump might level off, but Valliere does not expect any cuts.

Neither does the policy strategist think the Biden administration is going to break up the tech industry. This is mainly because Vice President Kamala Harris is a supporter of the industry.

“She knows all of the players in Silicon Valley; she knows all of the issues; they have contributed dramatically to her campaigns. So, I think she would argue that this is not the time to do anything really critical.”

The same applies to the Federal Reserve under Chairman Jerome Powell.

“I think that he is determined to do the right thing to make sure the markets and the economy stay in good shape,” Valliere said. This would not include negative interest rates like in Europe or the purchasing equities, but the Fed would nevertheless be very aggressive in keeping the monetary policy quite loose.

The new economic toolkit to deal with the fallout of the coronavirus pandemic had worked fairly well, he concluded.

“For quite some time, the chairman Jerome Powell has made it clear that we could have virtually zero percent interest rates for the next three years. He’s also indicated the Fed would accept some higher inflation,” Valliere said. “This is a big change for the Fed, and down the road in three, four or five years, it could lead to some inflation. I agree with all of the people who worry, but I think the Fed has done a tremendous job in stimulating the economy.”

On the fiscal side, Valliere added, Congress spent more than $3 trillion earlier this year, and another, albeit smaller, stimulus bill will follow at some point.

For investors another stimulus bill, continued easing by the Fed and a vaccine for COVID-19 are three big stories, he concluded.

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