Welcome to thoughts on the market. I'm Michael Zizas, head of Public Policy Research and Municipal Strategy for Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between US public

policy and financial markets. It's Wednesday, December 16th at 2 p.m. in New York.

With the Electoral College votes logged and key elected Republicans acknowledging Joe Biden will be sworn in

this president in January, it's time to look ahead to the next election. No not the

midterm elections, but something a little bit closer, the two runoff elections

for US Senate and Georgia that take place on January 5th.

Those elections are shaping up to be consequential for markets.

If Democrats pick up both seats, they'll hold the slimmest of majorities in the Senate,

a 50-50 tie with the new Vice President as

tiebreaker. Together with control of the House of Representatives and the

presidency, the Democrats would have a unified government. We expect that would

open the door to a variety of policy possibilities that are in consensus in the Democratic

Party, including an upsized COVID relief package, an infrastructure bill, and expanded health care

spending.

But there's less consensus about to what degree taxes could be increased,

and so we don't think it would open the door to enough tax increases to offset all that spending.

Bond investors should take notice here.

That's because, taken together, wins for Democrats could lead to a lot more fiscal expansion.

That means markets may have to price in higher economic growth and inflation expectations.

While it could prove fruitful for stocks over time, in the short term it could be a challenge for bonds

where yields would have to rise and prices fall in order to reflect this new reality.

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