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The only certainty that election night brought investors is that a clear Democratic victory has been wiped out. This reduces the chance of a strong stimulus. Investors flocked to the large Nasdaq stocks.
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For investors who have been betting on a ‘blue wave’ in recent weeks, with Democrats taking over both the White House and Congress, these promise to be nerve-racking days. With President Donald Trump performing better than expected and his Republicans appearing to be releasing their hold on the Senate, investment positions corresponding to a Democratic wave are under pressure.
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This was clearly visible in the market for US government paper. Ten-year yields fell to 0.8 percent, a clear signal that doubts are growing about the hefty stimulus package that Joe Biden and his Democrats are promising.
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Stimulus would fuel economic growth and possibly inflation too, which, along with the increase in government debt, puts upward pressure on interest rates. That pressure is now decreasing. Even if Biden wins the presidency, he still needs both houses of Congress to push stimulus legislation through. It will therefore be crucial who wins the exciting race for the Senate.
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Big tech
A starting rotation is also visible in the US stock market, away from the calculated broad Democratic victory. The Nasdaq tech exchange saw its profit rise to almost 4 percent on Wednesday. Without Democrats at the controls in Washington, the chances of a tough approach diminishing the monopoly power of big-tech companies, who would also have less to fear from Biden’s promised tax increases. The prospect of a higher tax on capital gains could otherwise prompt investors to quickly sell their highest-rising shares, in this case tech shares.
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The price gains of big-tech companies may also reflect their new status of safe values that are immune to the corona crisis.
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Apple
, Amazon
, Alphabet
at Microsoft
moved between 4 and 8 percent higher on Wednesday and saw their aggregate market value rise by $ 350 billion in one day. The price gains of big-tech companies may also reflect their new status of safe values that are immune to the corona crisis. This suggests that investors are playing it safe in anticipation of clear election results, which may be days away.
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Jeremy Lawson, chief economist at Aberdeen Standard Investments, notices a clear reluctance among investors as uncertainty reigns. ‘The market reaction is modest for the time being. You don’t see investors taking an aggressive stance on any particular election result. They keep their powder dry. ‘ According to Lawson, all scenarios are still possible, from the status quo with a new term for Trump to a President Biden with a divided or a Democratic Congress.
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Uncertainty can create buying opportunities in the short term.
Stefan Kreuzkamp
chief investment officer DWS
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Buying opportunities
This uncertainty can create buying opportunities in the short term, says Stefan Kreuzkamp, chief investment officer at DWS. As vote counting drags on and both sides turn it into a legal battle, ‘buy the dip’ opportunities arise when markets get nervous, according to Kreuzkamp. The controversial 2000 presidential election may be a guide to the potential magnitude of that dip. In the three days following election day, the S & P500 stock index lost over 5 percent in anticipation of a winner.
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Apart from the outcome, according to Kreuzkamp, there are important drivers for the stock markets that can make a dip attractive, such as the flexible policy of the American central bank. “The Fed will keep interest rates low in the medium term, and other central banks are also pursuing supportive policies,” says Kreuzkamp. Without Democratic stimulus, the Fed could be forced to make more bond purchases, which would weigh on interest rates.
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Compare
Moreover, budgetary stimulus will not be overcome if the Democrats have to give up. In recent months, both political parties have sought an agreement to combat the corona crisis with fresh stimulus. “There’s also likely to be stimulus with Trump, albeit on a smaller scale,” Lawson says. Kreuzkamp sees a new source of uncertainty there. “If we get a divided Congress or Trump as president, the timing and magnitude of the stimulus promise to become uncertain.” He points out that this uncertainty could persist for weeks, because a special election in January is already needed for one Senate seat.
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With a Trump victory, American stocks could climb 4 to 5 percent this year, Kreuzkamp believes, partly because the tax increase for companies promised by Biden then seems unlikely. A Democratic victory, in turn, can give European exporters a boost, because with Biden the risk of trade wars diminishes. As president, Biden can also partly reverse Trump’s wave of deregulation, which would particularly hurt the energy and banking sectors. Pharma stocks, meanwhile, are keen on a divided Washington: they moved higher on Wednesday as firm action against high drug prices becomes less likely.
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