Election Scenario #2: Biden Without the Senate

In the countdown to the election we will look at the most likely outcomes and how they will affect the market. The second is a Biden with but Democrats fail to secure a majority in the Senate. This is a highly plausible scenario, though betting markets show it's modestly less likely than a blue wave.  The 1st scenario was discussed here. 

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An important caveat in this scenario is Georgia where two seats are up for grabs. There's a high chance that no candidate gets 50% in either of the votes; in that case they will head to runoffs on Jan 5. If the neither Democrats nor Republicans secure the requisite 50 seats, the balance of power could come down to runoffs, which would be highly contested. Polls show both are very close.

Assuming we have some clarity shortly after the election, this scenario is a negative one for risk trades but ranks high in terms of uncertainty. A Republican majority in the Senate would have the power to block all Biden appointments and make it nearly impossible to pass any legislative agenda. In the shorter-term, it would make a pandemic stimulus package very tough.

Barring a miracle rediscovery of bipartisanship, this scenario could be akin to a standoff and Republicans  could make Biden's life very difficult. It's not all negative though. Biden would have control of foreign policy and would certainly ease trade tensions there. This result would also take a corporate tax hike off the table and some argue this is more positive for equities overall. Initially, this outcome would be more dollar-positive than a blue wave and gold should also slide as Senate Republicans rediscover fiscal discipline.

One thing to watch for in this scenario is how both sides signal they will approach dealmaking. There may be more common ground than meets the eye. Of course, some of that will depend on how quietly Trump exits and what role the senate plays in the transition.