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After days on tenterhooks, investors now have clarity about the next occupant of the White House and will start planning for the presidency of Joe Biden.
On Saturday, Biden was projected the winner by the Associated Press. The 77-year-old Democrat beat Trump in Pennsylvania and other key states, propelling him to victory over incumbent President Donald Trump.
The projections for victory for the former vice president come amid the heavy toll of the COVID-19 pandemic that had framed much of the race.
Here’s what the changing political landscape means for investors across Wall Street.
Stocks
Regardless of the victory in the 2020 elections, analysts said a declared winner and thus less election uncertainty paves the way for even higher U.S. stock prices, even with the President Trump’s campaign, as recently as Saturday morning, stating his intent to challenge the election results in several battleground states.
Also, many investors had penciled in a Biden presidency but a Republican Senate as the most likely outcome well before the November election, and thus had plenty of time to game out the eventual implications.
“This is a known outcome. Risk assets likes certainty,” said Scott Kimball, portfolio manager at BMO Global Asset Management, in an interview before the AP CNN, NBC and Fox News called the presidential race in favor of Biden on Saturday morning.
“A divided Congress, from a policy perspective, takes extremes out of either direction,” the BMO money manager added, taking the more ambitious measures from Republican or Democrats policy agendas out of the equation.
The S&P 500 index SPX, -0.02% finished last week’s trade 7.3% this week alone, trounced by the 9% gain in the tech-heavy Nasdaq Composite COMP, +0.03%.
The big story now could be how stocks with rapid earnings growth perform against shares of more economically sensitive companies.
Biden may have trouble pushing for stronger regulatory and antitrust action against some of the highflying technology companies, such as Google parent Alphabet GOOG, -0.09% GOOGL, -0.15%, which now faces an antitrust lawsuit and Facebook FB, -0.43% which is threatened by Congress calling section 230 of the Communications Decency Act into question, endangering the platform’s protection from liability as a publisher or content provider.
As investors pare their expectations for the size of another financial-aid package by Congress to boost the economic recovery from the coronavirus pandemic, U.S. Treasury yields may fall increasing the value of the future earnings of growth stocks, Esty Dwek, head of global macro strategy for Natixis Investment Managers, told MarketWatch.
Bonds
With Biden likely to run into opposition from Senate Republicans, less ambitious fiscal policy is expected. In that scenario, bonds will continue to rally as debtholders have less to fear from the higher inflation expectations that would follow from a faster economic recovery and increased debt issuance.
Stock markets may be rejoicing at the prospects for a divided government following the U.S. election, but it’s an open question as to what else the Federal Reserve can do spur an economic recovery from the pandemic after an already huge expansion of its balance sheet earlier this year.
The 10-year Treasury note yield TMUBMUSD10Y, 0.815% is at 0.78%, after trading as high as 0.94% on Tuesday night when hopes peaked for a Democratic sweep of Congress and the White House and another massive fiscal stimulus. So Treasury yields are likely to stay low or fall further when Biden enters the White House.
Jim Cielinski, global head of fixed-income at Janus Henderson, said one of the biggest risks that market participants may be ignoring is the potential for economic stagnation.
“I know everybody is worried about inflation. I’m not,” Cielinski said Thursday during a webinar hosted by Janus on the election’s impact on markets.
Instead, he’s more concerned that the Federal Reserve’s commitment to keeping benchmark interest rates near 0% for years to come won’t be enough to spur private credit and economic growth and or to stop “stagnation spreading into big parts of the economy.”
Commodities
For crude-oil prices CL.1, +0.94%, a win by Biden could lead to more restrictions in the energy market, including shale production. Biden has said he plans to ban new oil and natural-gas drilling permits on federal lands.
Production restrictions could lead to tighter supplies and higher oil prices, analysts said. Still, Biden has also indicated that he may revive the Iran nuclear deal and a relaxation of sanctions which may lead to more oil in the world market from the Islamic Republic.
See: U.S. election brings win-lose scenarios to the oil and energy sector
Meanwhile, Biden’s win, combined with a possible divided government, is likely to create uncertainty around the size of future fiscal stimulus measures, a boon to safe-haven assets like gold.
Emerging markets
Equities in developing markets, and especially in Asia, may thrive if Biden’s presidency leads to a more stable foreign and international trade policy.
Reduced geopolitical uncertainty will draw more investors into Asian assets, said Dwek, and these have already seen strong gains on the back of the region’s strong public health response to the COVID-19 pandemic.
The iShares MSCI Emerging Markets ETF EEM, +0.46% closed up 7.2% for the week, leaving it up 6.82% so far in 2020, as of Friday’s close.
With reporting contributed by Myra Picache and Joy Wiltermuth
