Washington Watch:
The Nation Waits…

Market Reaction: November 5, 2020


The nation is collectively holding its breath while we wait for the results of the U.S. presidential election. However, the stock market is less patient and has moved in advance of the results.

We can say two things with some certainty: 1) pollsters did not accurately predict the election once again and the odds of a Blue Wave have greatly diminished and 2) the House will likely remain Democrat and the Senate will likely remain Republican. Implying a divided government.

Under a divided government scenario, policy is less likely to change under either a Biden or Trump presidency. This should reduce investor uncertainty. If there is an infrastructure bill, it will likely be smaller in size, but is still possible under either candidate as both sides have some incentive to deliver federal funds to their state constituents. Though it is certainly not a given with the heightened level of partisanship. If former Vice President Biden does end up winning, but the Senate remains Republican, then the odds of increased corporate and individual taxes are significantly reduced. The potential removal of this policy change may help to offset investors’ concerns regarding less fiscal stimulus.

In terms of regulation, a Biden victory would likely not mean new regulations instantly because new regulations can often take significant time to implement due to the required business comment period. However, Biden could start enforcing existing regulations that President Trump did not. This could have some impact on energy and financial stocks. Health care stocks seem to be rallying on the prospect of a divided government as it reduces the odds of significant changes to the country’s health care system. Foreign policy remains an area of uncertainty with each candidate likely to take a very different approach with little involvement from Congress required.

A contested election remains possible with vote recounts and legal challenges already mounting, but a repeat of the stock market drawdown seen in the contested election between George Bush, Jr. and Al Gore in 2000 seems unlikely. During the Bush / Gore election, the S&P fell more than 11.0% between election day and December 20th (one week after Al Gore’s eventual concession). However, the country entered recession in early 2001. That is not the case now with the U.S. economy continuing to recover from its deep contraction in the second quarter of 2020. In addition, investors are likely to take some solace in the continued support from the Federal Reserve and an additional COVID-relief bill on deck. It is worth noting that since 1980, the S&P 500 was higher three months after the election 80% of the time with stocks often declining before the election, not after.

There is a clear path for both candidates but financial markets have moved in advance with an anticipation of divided government