Free | Global Macro & Strategy

Quick take: US election thus far and the investment implications

Update: 10/11/2020: Since writing this article, Joe Biden has claimed victory in the US election, and whilst Donald Trump is still pursuing legal action, the markets are pretty much moving on. It still looks like the Senate will be GOP controlled, and so the risk of extreme policy implementation has been removed, and the markets very much like this scenario. Hence, the main points in this article are unchanged. There has also been an announcement from Pfizer and BioNTech that their vaccine candidate is more than 90% effective based on initial trial results, lighting a fire under the markets, and sparking a rotation into the cyclical areas that have been beaten down due to COVID.

While its obvious that the result from the US Presidential election is still not final, here is a quick take on where it is at, how markets have reacted, and implications going forward.

As I write this, Joe Biden is well on his way to claiming the 270 electoral votes needed for an outright win in the US Presidential election, with 264 votes vs Trump on 214 (Source: Bloomberg). The Democrats are on 203 seats in the House (need 218) vs 188 for the Republicans. And of course, it goes without saying that this is still fluid, anything can happen, and who knows what will come of Trump’s threats around contesting the results.

The key however is that the Republicans (GOP) are on 48 seats in the Senate (need 50) vs 47 for the Democrats, and the pundits in the know in the US are predicting the GOP will end up controlling the Senate.

So as of now, the most likely outcome is for a Biden presidency, with a GOP controlled Senate. In other words, more political gridlock in the US.

 What does this mean for investors?

Whilst political gridlock seems like a bad thing (and it probably will be long term), counter-intuitively  the stock market actually liked this probable result. Some analysts were even claiming this is a ‘goldilocks’ scenario for the market. Why ?

  • It means that Biden’s proposed company tax hikes (and CGT changes for high income earners) are unlikely to get through a GOP controlled Senate, and;
  • The prospect of more onerous regulation (particularly around healthcare and big tech) has now been reduced substantially. Both healthcare and tech had big +4% rallies overnight, and hence with the big weighting of tech in the S&P 500 and Nasdaq, the headline indices had a very good night.

However this probable election result comes with one big negative that the market ignored last night. It means that the prospect of a huge new fiscal stimulus package is now more unlikely. For uber bullish investors, note that this narrative around “no more stimulus or smaller stimulus” could easily come back to the forefront of the market psyche very quickly, and so expect volatility to still play a hand as we traverse this period.

All up, the markets seems to be pricing in the prospect that we are just going to continue on with the same old “slow-flation” macro setup that has pervaded for many years now. This entails interest rates that are lower-for longer (forever?), slow growth, continued necessity for central bank monetary support, and huge premiums applied to stocks that can show strong secular growth.

Obviously this is early days, and we’ll certainly have updates in the Big Picture Summary and Asset Class Dashboard next week as we see how this plays out.

Author: Graham Parkes

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