We’re almost twenty four hours past the closing of the polls in the east of the country and we still don’t have a winner, however things have broken in the latter part of yesterday towards Biden and, barring any late crazy changes, it is highly likely that Joe Biden will win the election.
Importantly, while the election ended up a lot closer than expected, it wasn’t that close, and by that, I mean that none of the states look like they will be within a couple of thousand votes. Any attempts by Donald Trump to stop the remaining votes from being counted would also hurt him in Arizona which he needs at this point, so the odds of this being decided in the courts is very low in my view. In 2000, Florida went down to the wire and literally swung the election on its own. At this stage, Joe Biden can win with victories in either of Pennsylvania, Arizona (assuming Nevada goes to Biden as expected) and Georgia and he may very well end up winning all three. So, I think the worst-case scenario for markets is off the table.
The other main event from yesterday was the evaporation of the Democrats’ chances in the Senate, so we’re now looking down the barrel of at least two years of divided rule and that is likely to mean gridlock in Washington. However, markets rallied hard last night but if you look at where it rallied you can get an idea of why. Tech stocks rallied hard – any likelihood that big tech would be forced to break up is off the table for now. Growth stocks also rallied hard; this one is a little more complicated to unpack, but with the general consensus being that a Democrat clean sweep would be best for the economy, the likelihood is that this split may be better for Wall Street in that corporate tax hikes will not likely go anywhere and the economy may fare worse which bodes well for lower long-term interest rates and continued accommodative monetary policy.
The one area the market may be overlooking is the fiscal policy side of the equation, and the odds of a huge COVID-19 relief bill have dropped markedly. The Senate will likely support some relief, but it won’t be the $US2.2trn the Democrats were seeking. Additionally, a big infrastructure bill is now unlikely and the concern about the deficit and the national debt will become front-of-mind for Senate Republicans once again. So, there are undoubtedly some risks ahead even if the market has decided so far that this is a great result. But, with our main concern avoiding a repeat (or worse) result of 2000, overall the outlook for equities is promising and we think there is no need to adjust our investments in the wake of the election.
