Market reactions and views
It appears that former Vice President Joe Biden will be the next President of the United States. President Trump outperformed the polls, making the race much tighter than predicted. Ultimately, however, Biden won in Wisconsin, Arizona, Michigan and Pennsylvania according to the Associated Press (AP), all of which voted for President Trump in 2016, while holding the states that Hillary Clinton won in 2016. This should give Vice President Biden at least 290 electoral votes, above the 270 required for a majority when the Electoral College meets on December 14. Biden is also ahead in Georgia, which could add another 16 votes. President Trump has refused to concede so far, alleging voter fraud. He has filed a number of lawsuits to challenge vote-counting procedures, and there will be recounts in at least two states. However, Biden’s vote advantage in key states appears high enough to withstand challenges.
While President Trump did not prevail, Republicans are likely to hold the Senate. Republicans entered the election with a 53 to 47 advantage in the Senate, but also with 23 of the 35 seats up for re-election. With a Biden victory, Democrats need to pick up three seats for Senate control since the Vice President can cast tiebreaking votes. So far, the AP has called 31 of the 35 Senate races, with one net addition for the Democrats, but the other two additions will be tough to come by. One of the uncalled seats (North Carolina) is likely to be won by the Republican candidate. The other two seats, both in Georgia, will be decided, by run-off elections in early January. Democrats are unlikely to win both. While Democrats will hold onto the House of Representatives, President-elect Biden will likely be highly constrained in domestic policy.
With Democrats unlikely to capture the Senate, the country could face at least two years of gridlock. Ordinarily, this might be viewed as a positive point for the economy and markets because it reduces the likelihood of extreme policies in either direction. However, this time could be different due to the COVID crisis and the ongoing need for fiscal support.
The outlook for a fiscal stimulus package will be important for the economy and markets, particularly with the failure of House Democrats and the Trump administration to reach an agreement before the election. Under a Democratic sweep, we might have seen a $2 to $3 trillion plan passed shortly after the inauguration and a major infrastructure investment plan later in 2021. Both of these would have supported the economic recovery. Assuming Republicans control the Senate, Biden will have to scale back his ambitions. The Senate could still agree to a stimulus plan, but it will likely be closer to the $500 billion plan passed by the Senate in October than the $2.2 trillion plan passed by the House.
A positive aspect of a Republican Senate from the market’s perspective is that Biden’s proposed partial rollback of the 2017 corporate tax cut and an increase in the capital gains tax would be very unlikely to pass.
On the trade front, markets are likely to welcome more predictable trade policies from a Biden administration, even if it keeps pressure on China. The administration might seek to rejoin the Trans-Pacific Partnership in a multilateral push for trade reform with China, rather than the unilateral imposition of tariffs. The eurozone will almost certainly not face the same pressure on its trade practices that it might have under a second Trump administration.
After the deregulatory push from the Trump administration, Biden might look to regulatory agencies to accomplish what he will not be able to achieve through Congress, to the extent possible. At minimum, he is likely to reinstate environmental, health and safety regulations relaxed during the Trump administration. This is a downside risk for equity markets at the margin.
On the monetary policy front, we do not expect the election to have significant implications except that in the absence of a strong ongoing fiscal response to the crisis, monetary policy support will become more critical. This means the Fed is likely to remain accommodative for longer than it otherwise would have been. However, it is doubtful that monetary policy has sufficient tools on its own to achieve the Fed’s inflation and employment mandates over the short to intermediate term.
The equity market reaction to the election has been positive so far, but of course, we would caution against drawing firm conclusions from very short-term performance. The positive reaction might be due the unwinding of pre-election hedges on the resolution of election uncertainty. It could also be that the market had priced a high likelihood of a Democratic sweep over the past few weeks and prefers mixed government despite the lower potential for stimulus.
Market behavior does imply a slower growth path, with cyclical stocks underperforming technology and other non-cyclical stocks. Intermediate- and long-term interest rates have fallen, suggesting that the Fed will keep rates lower for even longer in the absence of a fiscal stimulus. Similarly, inflation breakeven rates on TIPs have declined. The dollar has generally traded flat against major currencies.
We entered the US election suggesting a tilt toward riskier assets, including an overweight recommendation to growth fixed income (emphasizing high yield credit) and a slight bias to equities. We viewed a Biden administration and a Republican Senate as a downside risk scenario due to the limited prospects for further fiscal stimulus. While that scenario appears to be the likely outcome, we are not changing our views at this point. We will be closely monitoring policy implications and the market reaction, but the US election result is just one factor that will affect the global economy and markets in the coming weeks and months. Of course, we will promptly communicate any changes to our views.
1 As of the afternoon of November 5, AP has not yet called Nevada, which Clinton won, but it appears likely that Biden will prevail.