US Election News

The announcement of Joe Biden as the winner of the 2020 U.S. Election has led to predictions on some trends about how markets might react to the results and what might happen in 2020, drawing on the data from the past four United States presidential elections. The “ Biden Bounce” has proven to be the steepest post US election rally in the last 20 years after the S&P500’s spectacular gains. $500 Billion worth of trades were registered only in US stock markets alone. Figure 1 shows the spectacular trade increase.

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Digging into the market sentiment around presidential elections

Can  one person single handedly control the $30 trillion U.S. stock market or $20 trillion U.S. economy?

The common notion is that markets or economies witness rapid changes around election rolls, presidents get far too much blame when things go poorly and far too much credit when things go well. While it may have a certain impact on sentiment of the investors and decision -making of consumers and businesses, owing to the changes in tax policies; the prevalent business cycle has a bigger role in determining the overall performance of the markets.

In order to understand the context of the same, we can take cue from CAPE ratio (cyclically adjusted price -to-earnings ratio of the S&P 500) compilations over the presidential years by Robert J. Shiller. The starting and ending valuations of the10 yr treasury yields speak lengths of the turns markets took during a certain president’s time in office.

We can clearly witness some wild swings between inflation and deflation back in the 1880s during the Arthur administration. Things were relatively calmer when Reagan took charge of the office in the 1980s. During Coolidge’s term the stocks witnessed extraordinarily low valuations which went up insanely high, just before the onset of the Great Depression. Clinton’s two terms had the highest valuations in history while these were pretty low during Obama’s time.

The S&P 500 was more than 55% up nearly 4 years ago when Trump took charge of the office- the CAPE ratio has gone from 28.1x to 31.6x, trailing 10 years’ worth of earnings. The relatively small increase in valuation tells us fundamentals have kept up for the most part. 

The next US president will deal with the second highest CAPE ratio ever for a president along with the lowest interest rates in the past 140 years or so, making it one of the most challenging market environments to handle.

In simple words,” the market is bigger than any person or office.It will do what it’s going to do no matter who lives in the White House.”

US market soars despite election uncertainty 

Shares rallied as investors bet the “close race” reduced the chance of big changes for business.

The gains were driven by tech and health businesses since they now seem less likely to face new regulations. Facebook shares rose more than 8 percent, while double-digit jumps were seen by many big health insurance companies. 

The Dow closed up more than 1.3%, while the larger S&P 500 climbed 2.2%. Nearly 3.9 percent was won by the tech-heavy Nasdaq.

Against some expectations of the landslide win for Mr. Biden, however, the uncertainty of the election did not appear to worry US financial markets, which have proven resilient this year despite a crash in March triggered by the coronavirus.

In the overnight US futures market, there was a brief sell-off, as investor hopes faded that a so-called Blue Wave victory by Democrats would usher in a big-spending package for coronavirus relief and push higher share prices. 

Mr. Biden previously proposed to raise the corporate tax rate, yet the close race lowered the probability of such a potential reform, leading to the bounce back in shares.

The business lobby group, Chamber of Commerce claimed the election as a win for business interests, pointing to Republican resilience in the House and Senate. The group also cited the results of some state-level fights such as a victory in California will benefit tech firms (e.g. Uber) by exempting them from a law mandating stronger worker benefits.

"Divided government makes sweeping legislation inherently hard," said economist Michael Pugliese of Wells Fargo. 

Conclusion

“Put on your seat belts,” said Nathan Sheets, chief economist at PGIM Fixed Income. “The markets were prepared to absorb a clear victory by either of the two candidates — but the uncertainties associated with a disputed election were what investors feared the most.”

Some investors still cautioned that significant legal challenges to the election results could weigh heavily on sentiment. “Any suggestion that the outcome could be contested by either the Trump or Biden campaigns is likely to be viewed dimly by investors, and could give way to a period of renewed volatility in equity and currency markets,” warned Richard Buxton, head of strategy at Jupiter Asset Management.

Some investors looked to history to inform them how markets would respond to a more lengthy period of deciding the presidential vote winner.  In 2000, when the US Supreme Court intervened to halt the Florida recount, the fight between Al Gore and George W Bush did not end until December 12. Over that period, US stocks fell nearly 5 percent, the gold price rose almost 4 percent and the 10-year Treasury yield dipped 0.85 percentage points to 5 percent, Invesco data show.

Despite the short-term importance of more fiscal stimulus for the US economy and the possibility of a messy transfer of power, investors and analysts stressed that the longer-term market outlook would be more dictated by efforts to contain and roll back the pandemic that has roiled the global economy this year.

“The next president and his administration could hasten the US economic recovery through the right policy mix,” Mr. Levitt said. “Nonetheless, I believe that betting against that recovery over the next couple of years, irrespective of the ultimate outcome of the 2020 election, is akin to betting against medicine, science, and human ingenuity.”

So what is your opinion on the US election? Please share your thoughts with us!

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