The start of a new year is always exciting; full of wonder and new beginnings. That is, of course, unless the first few days feel like a continuation of the previous year… and the previous year was 2020.
In the midst of record rates of COVID-19 infections and deaths, the first week of 2021 was jarring, unpredictable, and sometimes frightening. Prior to the joint session on Wednesday, some members of Congress announced they would object to the typically ceremonial act of counting Electoral College votes, which would ultimately delay—not overturn—the certification of President-Elect Joe Biden’s election.
The day quickly devolved into riots as mobs of activists and Trump supporters stormed the halls of Congress in an effort to disrupt the vote counting. This marked the first breach of the U.S. Capitol since the British set fire to the structure in 1814. The chaos lasted several hours and ultimately resulted in the death of five people involved in the ordeal. Order was eventually restored, and in the early hours of January 7th, Vice President Michael Pence certified the election victory for Biden and Harris.
On Tuesday, Democrats Raphael Warnock and Jon Ossoff narrowly defeated Republican incumbents Kelly Loeffler and David Perdue, creating an even split in the Senate, with Vice President-Elect Kamala Harris serving as the tie-breaker.
Legislative Implications
There are a number of implications of Democratic control of the Senate:
- The GOP may object to, but ultimately cannot halt, Biden’s nominations or appointments for the cabinet, executive branch, or the judiciary.
- Democrats will control the legislative agenda and leadership of all committees and subcommittees.
- Given the slim majority, transformative legislation (Medicare for All, Green New Deal, etc.) is unlikely.
- Democrats will likely have to rely on the budget reconciliation process and executive orders to implement Biden-Harris policy.
Market Reaction
Treasury yields drifted higher as a key priority of the incoming administration would likely involve more spending initiatives for the vaccine rollout, higher direct payments to households, and possibly more state/local aid.
Meanwhile, the S&P 500 rose roughly 1.5% mid-session on January 6th, but moderated as chaos and violence erupted at the Capitol Building. Companies more leveraged to the U.S. economy led the markets higher. In a continuation of fourth quarter trends, small caps outperformed large caps and value outperformed their growth counterparts.
Financials was the best performing sector of the day, led by banks, which benefited from higher rates and a steeper yield curve. Cyclicals, including materials, energy, and industrials, also outperformed. On the other hand, longer duration sectors, such as IT and communications services, finished the day in negative territory.
On Thursday, market trends continued with rising Treasury yields and stock market gains. IT rebounded and helped propel the NASDAQ Index above 13,000 for the first time.
Energy equities rallied and Brent crude traded into the mid-50s ($54 per barrel) for the first time in nearly 12 months. Energy rose due to production decisions by the Organization of the Petroleum Exporting Countries and the potential for near-term stimulus from the United States. Clean energy also rallied on optimism about the incoming administration’s climate policy.
Executive Order Confusion
Market volatility was further stoked this week by the execution of Executive Order #13959, which was issued by the Trump Administration in November to prevent “U.S. persons” from financing the development and modernization of the Chinese military.
Inconsistent guidance regarding whether the order applies to certain types of companies and investment vehicles led to broad confusion among investors, investment managers, and exchanges. The confusion is best illustrated by the actions of the New York Stock Exchange, which, over the course of one week, announced it would delist three Chinese telecom companies, then reversed its decision, only to backtrack again stating it would follow through with the delistings after all. Companies initially named in the order will be subject to investment restrictions beginning January 11th. The order and confusion around its implementation resulted in heightened price volatility for impacted Chinese companies.
Summary
Although equities traded off of intra-day highs on January 6th, the ensuing rally was sharp—particularly in sensitive areas of the economy. Markets dislike uncertainty, and while the start of the year has been filled with chaos and surprises, when the dust settled, some clarity was gained in terms of the balance of power in Washington.
The stock market’s start to 2021 illustrates yet again the challenges of timing investments based on political sentiment and expectations.
We continue to advocate for disciplined rebalancing of client portfolios, which allows clients to be steadfast in their portfolio construction, have the opportunity to buy when markets are weak, and protect accrued gains when markets rally.