At the time of writing, the S&P/ASX 200 Index (ASX: XJO) is trading flat at 6,695 points. The ASX 200 still isn’t quite at the heights we saw back in February last year, when it hit a new record high of 7,162.5 points just before the coronavirus-induced market crash.
Even so, we are getting pretty close to those levels again. Since the start of the year, the ASX 200 has really hit the ground running. Even though the new year is only 12 days in (and 7 trading days), the index is already up 0.7% for the year to date.
That doesn’t seem like a lot on face value, but if that pattern holds all year, the ASX 200 would be in for a rollicking good time in 2021.
But why are shares continuing to climb? Let’s be frank, there hasn’t exactly been a stack of good news in 2021 so far, whether that be on the economic or coronavirus fronts.
Well, it’s possible that what’s happening in the United States is helping enormously. I know how that sounds less than a week after the shocking scenes in the US Capitol building emerged.
US Senate elections send shares higher
It has to do with the (somewhat overshadowed) Senate elections that took place last week on 5 January (6 January our time). These were the runoff elections for the 2 US Senate seats of the state of Georgia.
Against the odds, the Democratic Party won both seats in the conservative Southern state. That puts the balance of power in the Senate evenly divided between Democrats and Republicans at 50-50.
And those wins mean that once president-elect Joe Biden and vice president-elect Kamala Harris are sworn in, the Democrats will control the US Senate. Why? According to the US constitution, the vice president breaks a Senate tie if the chamber is evenly split.
That also means that, come 20 January, divided government will end. And the Democratic Party will control the ‘trifecta’ of the House of Representatives, the Senate, and the White House for the first time since 2010.
This situation is what’s got investors hot under the collar. As an indication, the ASX 200 is up 1.9% since 6 January, even though it’s only up 0.7% year to date.
But why? What do US politics have to do with the Australian share market?
Well, as you might gather, the performance of the US markets are one of (if not the) largest influences over our own ASX. And the Democratic sweep of the Congress has also gotten American investors fired up. The US S&P 500 Index (INDEXSP: .INX) is up 2.75% since 5 January.
So what’s so exciting about the Democrats winning control of Congress?
The importance of the ‘trifecta’
Well, in the US, laws need to advance through both Houses of Congress and be signed by the president to become law. If any of those branches are controlled by another party, it greatly reduces the chances of all but the most bipartisan bills becoming law.
But since all 3 are going to be in Democratic hands come 20 January, Joe Biden’s party can get much of their agenda through without Republican support.
According to reporting in the Australian Financial Review (AFR), the priorities for the incoming Biden Administration are going to revolve around a lot more stimulus spending. Over the past month, outgoing President Donald Trump, as well as the Democrats, have been calling for a round of US$2,000 stimulus cheques to go out to most Americans.
But the Republican Senate blocked this measure. It instead limited the cheques to US$600. According to the AFR, one of the first cabs off the rank on 20 January will be getting the larger cheques out as soon as possible.
Additionally, the Democrats are also hoping to ink a new large-scale infrastructure spending bill, send additional monetary aid to the states, and increase spending in healthcare. And that is, of course, in addition to the unprecedented level of monetary easing (near-zero interest rates and quantitative easing (QE)) that the US Federal Reserve is promising to keep up going forward.
All of this stimulatory spending bodes extremely well for the US economy, but more importantly the share market. And that is why investors, both over in the US, and here in Australia, have been sending shares higher in 2021 so far. After these positive developments for investors as we kick off 2021, it will be interesting to see where the rest of the year takes us.