Thursday 12 November, 2020
While the US election didn’t produce the ‘Blue Wave’ that many Democrats had hoped for, it seems on track to deliver excellent results in market terms.
While several uncertainties remain - such as Trump legal challenges and two vital Senate run-off elections next January - enough pieces are falling in to place to give markets reasonable confidence in the direction we’re headed.
Of course, even as we work through the impact of the election, the market sent clear signals that a Covid-19 vaccine ‘trumps’ all other events. The news on a promising vaccine from Pfizer greatly outweighed the election saga - but as that future unfolds, we must also weigh up how a new political regime will handle the pandemic and the recovery.
Baring a dramatic and unlikely judicial win by the Trump campaign, Joe Biden will be the President of the United States from 20 January 2021. While this outcome was largely expected, the closeness of the race surprised many and has allowed Trump to publicly challenge the end result. The Senate, while still not decided, is likely to remain in Republican hands - unless runoff elections for Georgia’s two Senate seats ‘turn it blue’ on 5 January. However, with Democrats needing both wins for Senate control, and Republican candidates currently favoured in both races, the most likely outcome is that Biden will rule over a divided Congress.
While a divided government may appear unhealthy for many Americans, the market saw it as a helpful handbrake on issues such as government spending, increased regulation, and tax increases. Fiscal stimulus is likely to be smaller if Republican sign off is necessary - and may be postponed if the economy continues to gradually improve, with Pfizer’s vaccine news adding further complexity.
Equity markets were more hopeful that a divided government would lower the likelihood of tax increases and increased regulation. President-elect Biden’s proposals to raise corporate tax rates to 28% from 21%, and increase personal income tax for those earning over $400,000 are unlikely to progress through a Republican Senate.
Likewise, ambitious spending projects such as his $1.7 trillion clean energy plan, and expanding the Affordable Care Act, may be reined in by a Republican Senate. From a market point of view, this may deliver a reasonable amount of fiscal stimulus if clearly needed, but with less the risk of higher taxes.
Despite this - and the overwhelming impact of a future Covid vaccine - the election outcome still has long-term consequences. Health care, sustainable energy, and infrastructure will most likely still benefit from a Biden presidency, even if Congress is split, but the magnitude of the potential investment is now limited. On the other hand, it may become easier for Biden to find common ground and focus on foreign policy and renegotiating trade deals.
In these volatile times, we remain focused on building a diversified portfolio of high-quality, liquid investments that seeks to weather the storm and take advantage of market opportunities.