Why are financial markets relaxed about who wins the Presidency?

Here's what the US election means for stock markets and your investments.
The White House | Wealthify
Reading time: 4 mins

After spending what is estimated to be almost 11billion dollars[1] the US Presidential and Congressional elections are ending. According to most media projections, the Democratic candidate, Joe Biden, has won and should become the 46th President of the US*. However, in Congress (the legislative branch), the House of Representatives (House) is comfortably forecast to remain with the Democrats but the Senate appears likely to remain with the Republicans. However, neither chamber is showing signs of the so-called “Blue Wave” anticipated by pollsters before the election. So, why does this matter so much to markets and why do they appear calm about this outcome?

*N.B. There are still some legal challenges that need to be resolved for this race to be officially over. As there are tight margins in some states, we will undoubtedly see recounts and legal battles to challenge the validity of the votes.

 

A split congress means fewer laws can expect to be passed, meaning less uncertainty
Firstly, a divided Congress means that less drastic changes will occur because any new laws generally require both the House and the Senate to approve bills before the President signs them. The President can refuse to sign a bill, which is a veto, in which case both the Senate and the House will need to approve the bill by a two-thirds majority to overrule the President’s reluctance. But if Congress is split along party lines meaning neither party has overall control, then this simply will not be possible unless there is a bipartisan issue that can unite both sides of the aisle.

As highlighted in our Quick Guide to the 2020 US Election, stock markets would take a split Congress favourably primarily because it means less risk of an increase in regulation or higher taxes.

 

Less regulation is better for “Big-Tech”, Healthcare, and Financial Services
If Congress can’t agree how to alter laws, it also makes it difficult to change them in order to enable long-discussed (at least by politicians) action against so-called Big Tech via antitrust laws. These laws protect consumers by regulating companies with significant market share/control and it’s likely we’ll see a move to strengthen existing laws. But as perverse as it may sound, this legislative gridlock is actually positive for investors. It is also important to note that while President Trump has been combative with China over Trade, assuming Biden becomes the next President, the rhetoric might become a bit more moderate, but the Democrat candidate has stated he wants to work to coordinate a global effort to engage Beijing.

 

More infrastructure spending if parties can agree how to pay for it
Similarly, while both parties support greater infrastructure spending, they do not agree on how to pay for it. The Democrats would prefer to raise taxes or increase borrowing to boost infrastructure spending, whereas Republicans have advocating using tax incentives to spur private investment in public works. A lower level of fiscal spending, will also increase the burden on the Federal Reserve (the US equivalent of the Bank of England), which may require an increase in the current Quantitative Easing plan to help support growth – this means the Federal Reserve may need to buy more financial assets, such as government bonds, to lower interest rates and increase the money supply to support the economy.

 

Covid remains key to the recovery
Global growth remains dominated by Covid-19 and the knock-on impact of economic implications of restrictions. While mortality rates at present are lower than during the first three months of 2020 (first quarter or Q1), the level of infections and hospitalisations are once again high. This rise is far more marked in Europe where cases are now exceeding those seen earlier in the year but also because the US saw much less of a decline in cases over the summer. However, this may see an elongated Covid-19 experience for the US but with higher economic performance. Whereas Europe can expect to see a further economic hit from the resumption of lockdown measures. At present the main driver that would lift markets is a vaccine coming earlier than expected in 2021, with the converse being the key risk.

[1] https://theconversation.com/the-scale-of-us-election-spending-explained-in-five-graphs-130651

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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