With the election result still up in the air, potentially
for days to come, one thing investors had hoped for can now be all but ruled
out: a coordinated and consistent economic policy from Washington.
In the grand scheme of things, market moves this time haven’t
been colossal, but they have been telling, especially in the bond market.
In 2016, an equity selloff was the widespread consensus
reaction to a Trump victory, which was upturned in a matter of a few hours as
investors realized the mathematics of the races would allow for ambitious
corporate-tax cuts. But if the equity market told the story of the 2016
election, it is the U.S. Treasury market that’s singing now: 10-year yields
rose to as high as 0.94% shortly after polls closed on the East Coast. As it
became obvious that some form of divided government is far more likely than
polls had implied, yields tumbled back to as low as 0.78%.
The most likely outcomes now are a Democratic president
dealing with a Republican Senate, or a Republican president dealing with a
Democratic House of Representatives. The latter has failed to produce a second
round of stimulus to help the U.S. recover from the pandemic. The former is not
any more promising.
Just as financial markets are amoral, they are also
apolitical. A narrative could easily have been constructed for a positive
market reaction if either party won a clean sweep across both houses and the
presidency. With the level of rancor between the two parties, any form of split
result is difficult to see optimistically. The narrow path to surprise outcomes
hasn’t closed yet, and the possibility of unified government shouldn’t be entirely
scotched, but results so close and contentious could easily produce long
disputes in the courts.
A paralyzed government places more weight on the shoulders
of the Federal Reserve, too. Having taken the leading role in economic policy
during much of the period after the financial crisis in 2008, political turmoil
may leave Fed Chair Jerome Powell with more responsibility.
Major companies and particularly tech giants might have
groused about Democratic plans for taxes and regulation, but smaller businesses
would have certainly benefited from stronger stimulus-driven growth: As Nasdaq
futures jumped when President Trump began to outperform expectations in early
counts, the Russell 2000’s futures began to fall.
President Trump and former Vice President Joe Biden
addressed supporters early Wednesday morning as votes were still being tallied.
Biden said he was optimistic, while President Trump raised the possibility of
election fraud without citing any evidence. Photos: Carlos Barria/Reuters;
Stefani Reynolds/Bloomberg News
In any case, the outlook doesn’t look good for something
that would break markets out of the relative stability they’ve been in since
the late summer, both in equities and bonds.
The bottom line: Delayed or less-aggressive stimulus would
be bad news for cyclical stocks, but investors who weren’t already positioned
aggressively should steer clear of making any overwhelming judgments or
immediate decisions.
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