Is the Stock Market Democrat or Republican?
Equity
After a laborious wait to count a record number of votes, Joe Biden was declared the US President-elect by media outlets on November 7th. As of writing, President Trump has not yet conceded the election, but his legal challenges to the results have not had any significant impact. And, while most investors feared market turmoil at the thought of an uncertain election, markets actually welcomed the clear referendum of a new President with its best weekly performance since April. The S&P 500 jumped 7.3% for the week of November 2nd to 6th — its biggest election week gain since 1932.
Biden’s victory would mark a switch from Republican to Democrat leadership and, when it comes to elections, investors often wonder which Presidential candidate the stock market would prefer. History has proven that the market exhibits no partisanship, and does well regardless of which party controls the White House. This is because it’s largely driven by business cycles and macroeconomic events, rather than party affiliation.
This was proven by the market reaction to Pfizer’s announcement of a 90% efficacy from its COVID-19 vaccine, which largely overshadowed the announcement of a Presidential winner. Vaccine news resulted in a market rally — with airlines, movie theatres and cruise lines jumping 20% as investors began a re-opening rotation out of stay-at-home stocks. That market exuberance has since subsided, as several hurdles remain as to when the vaccine will be approved, how it will be distributed (given its need for cold storage at -70°C) and how accessible it would be to billions of people around the globe as cases continue to rise and new lockdowns are imposed.
Preliminary election results also point to a divided government — a Democrat President and split Congress, should Republicans keep hold of the Senate in the January run-off elections. This could result in political gridlock, putting more pressure on the Federal Reserve to navigate the economic recovery from the monetary standpoint with less fiscal support.
The biggest discomfort the stock market faces under a Biden Administration is the proposed increase in corporate taxes from 21% to 28%, which could slash S&P 500 earnings per share (EPS) by up to 13%. The Biden campaign has also positioned itself as tough on Tech, with potential antitrust laws coming into play for Big Tech firms like Google. Heightened regulatory uncertainty could weigh on the Tech sector’s elevated valuations. However, fears of higher taxes and overregulation may largely be assuaged by the potential of a Republican Senate to rein in these policy proposals.
Under a Biden Administration, opportunities for gains will likely arise in the infrastructure and ESG/renewable energy sectors given the $2 trillion “Build Back Better” green infrastructure proposal of “Net Zero Emissions by 2050”.
We view any dips in stock prices this month as inviting entry points to the market, as it has historically been poised to deliver its best performance in a post-election year. Further, the stock market is more sensitive to macroeconomic events than Presidencies, and next on the post-election agenda should be more fiscal stimulus — which usually results in a rally for stocks.
The overall market would be guided by the course of economic recovery in the medium term and the much anticipated re-opening of the economy under a COVID-19 vaccine release.
Fixed Income
The benchmark 10-year Treasury yield, which hit its lowest level since the start of the pandemic on August 4th at 0.52%, has since recovered to 0.88% as at the end of October. The yield was able to jump above the 0.8% mark after the Federal Reserved unveiled new measures to help small firms get through the COVID-19 pandemic. The US Central Bank committed to reducing the minimum loan size from $250,000 to $100,000 and will ease restrictions on debt for companies already participating in the Paycheck Protection Program.
Relatively strong economic data has boosted risk sentiment. US consumer spending rose 1.4% for September and US GDP rose by 33.1% in the third quarter, providing a welcome sign of economic recovery.
In terms of the Presidency, we note that historically, elections have not been material influences on bond market performance, though there could be some short-term volatility as with the 2016 surprise win of Donald Trump — which led to Treasury yields dipping lower.
Originally published in the Trinidad and Tobago Business Guardian Newspaper on behalf of ANSA Merchant Bank.
The information contained in this article is not intended and should not be used or construed as an offer to sell, or a solicitation of any offer to buy, securities of any fund or other investment product in any jurisdiction. The information in this article is not intended and should not be construed as investment, tax, legal, financial or other advice. Past performance is not indicative of future performance.
