Apple Stock: This Is How Senate Control Matters

This post was originally published on this site

The “last dance” in the 2020-2021 US election cycle is coming to an end. To the surprise of many, Senate control will likely shift back to the Democratic party for the first time in six years.

Judging by market action, investors clearly see the recent developments as a negative for Big Tech stocks. Apple is down about 2% as I type this sentence, although it is still early in the trading session.

The hard question to answer is: are the market’s fears over a blue federal government justified?

Why so bearish?

Reuters explains very simply why a Democratic White House and Congress might spell trouble for Big Tech. According to the news outlet:

“Democrats could take a tougher stance on addressing the influence of big tech companies, pressuring stocks that have led the market for much of the past decade.”

For years, FAAMG companies (minus Microsoft, largely) have been under the microscope. Legislators fear that these players may have become too big and influential, and that their massive competitive advantage could be hurting smaller businesses and, ultimately, the economy at large.

The other problem, although probably a lesser one, are corporate taxes and rules around cash repatriation. President Trump passed a tax cut in 2017 that lowered the tax rate sharply to 21%, but President-Elect Joe Biden has vowed to change the policy. With a blue majority in Congress, he might be able to do just that.

Regarding taxes, note that corporations in general, and not only Big Tech companies, stand to lose from a rate hike.

Slim majority, bipartisan scrutiny

I believe that the investors’ fears summarized above are reasonable, but they may be a bit short-sighted.

First, the Democratic majority in the Senate, if confirmed, will be minimal. Any proposed policy that is deemed too radical or disruptive could fail to pass, if moderates choose to stand in the way.

Second, the antitrust risk faced by Big Tech is largely bipartisan. Republican lawmakers have also shown a desire to scrutinize the likes of Apple for their dominance in the digital arena.

Third, a Democratic federal government is also likely to be much more laxed on fiscal stimulus associated with the COVID-19 crisis. Additional aid paid to consumers could provide yet another boost to spending, and companies like Apple could be beneficiaries in the short term.

A word on market action

Regarding market action (as opposed to business fundamentals), Apple and its peers could suffer from a rotation into small cap and value stocks. This is the case because more government spending to support the economy in the early stages of its recovery, a flagship policy of the Democratic party, will likely benefit cyclical stocks more than it would Big Tech.

Therefore, it is not unreasonable to expect FAAMG to underperform relative to sectors like industrials, financial services, possibly even materials. Time will tell.

Read more from the Apple Maven:

(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)