Daily Brief: The Democrats Took The Senate, And They Have Big Economic Ambitions

Daily Brief: The Democrats Took The Senate, And They Have Big Economic Ambitions

about 3 years ago3 mins

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Democrats won control of the US Senate late on Wednesday, securing them both chambers of Congress and a blank check to support the economy however they like.

What does this mean?

One of the main assumptions investors are making is that Democratic control has paved the way for a big economic boost over the next few months – first through another coronavirus aid package, and eventually through more spending on infrastructure, education, and clean energy. All this money flowing into the economy should be good news for stocks, which now have more economic and earnings growth to look forward to. And while the money needs to come from somewhere, investors seem optimistic that it won’t be from profit-damaging tax hikes – if only thanks to the Democrats’ razor-thin and precarious majority.

S&P 500
Source: Google Finance

Why should I care?

For markets: It’s cyclicals’ time to shine.

The stocks that stand to benefit most from the newfound economic support are those of energy, materials, and industrial companies – that is, “cyclicals” sensitive to economic peaks and troughs. Banks – which have outperformed the US stock market since the presidential election – could keep doing well too: investors reckon the government will borrow more to cover its increased costs, which should in turn push up interest rates. The US Federal Reserve, meanwhile, is keeping its short-term interest rates – the rates at which it lends commercial banks money – low. That allows those banks to lend money at a higher rate than they spend on borrowing it, and should boost their profits.

The bigger picture: Everything in moderation.

The anticipation of more government spending and a boost to economic growth is also raising expectations that the prices of goods and services will increase (i.e. inflation). But if prices climb by too much, too quickly, central banks might hike interest rates to cool things down. And that could discourage companies from taking out loans and spending money – the exact opposite of what the higher-ups are trying to achieve.

Inflation expectations climbing

Keep reading for our next story...

Roblox Resumed Its Plans To Go Public

Roblox image

Roblox announced late on Wednesday that it’d be resuming postponed plans to list on the stock market – and the gaming platform’s hoping it’ll score big when it does.

What does this mean?

Roblox was supposed to “go public” last year, but it delayed the move after Airbnb and DoorDash – whose price surges following their initial public offerings suggested they’d sold their shares too cheap – spooked the company. So to make sure it doesn’t miss out on a lot of cash, Roblox is cutting out the investment banks and planning to sell to public investors via a “direct listing”. That means the market – not bankers – will set its share price, and that every investor – retail and institutional alike – will get to buy in at the same time.

Why should I care?

For markets: Roblox ain’t no guinea pig.

Companies only used to be able to sell existing shares via a direct listing, but recent regulatory changes now mean they can sell new shares and raise fresh capital. Still, Roblox has opted not to take advantage of those new rules: it might not have needed to, given that it also announced it’s raised cash separately from private investors. For the record, that latest fundraising round valued the company at $30 billion, or around $45 a share – which hints at what investors might pay when Roblox does list.

Roblox daily active users
Roblox daily active users | Source: InvestGame

The bigger picture: Top of its game.

Roblox’s stock market debut will follow a breakneck year: its daily active users and revenue in the third quarter of 2020 were almost double what they were the same time a year before. Video games have been so popular during the pandemic, in fact, that they’re expected to have made more money last year than the global movie and North American sports industries combined. And given the hype around certain recent console releases, analysts reckon this just be the start…

COVID-19 fuels global surge in video game revenue
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