As of Thursday morning, a winner to the 2020 presidential election has yet to be “officially” declared as several battleground states have yet to be called. Even as more clarity emerges from remaining votes being counted in Arizona, Nevada, and Pennsylvania today and tomorrow, recounts and legal challenges could draw this out longer.
A Democratic capture of the Senate appears much less likely now than it did Tuesday. Barring an extraordinary event, we seem destined for a divided Congress.
This is in stark contrast to the Democratic sweep that markets had been pricing in leading up to the election. We look to market price action as a dispassionate and impartial guide as to where consensus among market participants lies.
Markets are now adjusting rapidly to a scenario in which a President Joe Biden—should he win—may not be able to enact large parts of his agenda because of a Republican-controlled Senate, or to a second term for Donald Trump and a status quo Congress.
Here we offer 10 significant observations based on currently available information:
Treasury Yields Down
Treasury yields are down sharply post-election as the market digests the narrative that a divided Congress could likely mean a smaller stimulus package, whenever it does come, under a Biden or Trump presidency compared to under a Democratic sweep. Treasury yields are strongly correlated to economic growth potential, and the market had appeared optimistic over a large fiscal stimulus package’s ability to inflect a slowing economic recovery higher. Further, the decline in yields may also be accounting for softer inflation expectations because of delayed stimulus. Breakeven inflation rates—measured by the difference in the yield of inflation-protected bonds and their nominal counterparts—have fallen on the week as the odds of a blue wave have declined.
Financials Lag
Financials had risen sharply in recent days in response to climbing Treasury yields and a steeper yield curve. A cyclical sector, financials would have stood to benefit from a larger fiscal stimulus package. Some regulatory fears hovering over certain industries may be dampened, however, under a divided Congress.
Industrials and Materials Lag
Investors were hoping that a large part of any stimulus package passed under a Democratic sweep would focus heavily on infrastructure spending, which would benefit companies levered to a major building initiative. While still a priority for both parties, the scale is likely smaller under a divided Congress.
Growth over Value
While areas of the equity market tied to the size of an eventual stimulus package struggled in the immediate aftermath of the election, stocks with elevated long-term growth rates that are less sensitive to fluctuations in the economy are receiving renewed interest. These stocks, including FAANG stocks, have been the overwhelming victors so far this year, but had been selling off somewhat leading up to the election.
Dollar Volatility
The US dollar has had a wild ride since election results have started rolling in. On the one hand, a divided Congress reduces a potential Biden presidency’s ability to enact major corporate tax increases, which would be negative for the dollar. On the other hand the United States would likely have a less aggressive trade policy under a potential Biden win, which had been one thing propping up the currency in the first three years of Trump’s term. In aggregate, though, the dollar is down slightly, which is consistent with the prevailing trend in the last several months.
Emerging Markets Up
Emerging markets equities are receiving a large bid post-election as the dollar weakens slightly and investors begin to make a bit of an explicit bet on a Biden victory. Foreign policy is largely driven without major input from Congress, and a Biden presidency is perceived to be less confrontational with China, the dominant weight in the emerging markets equities index.
Technology Up
Technology has been stuck in somewhat of a rut since its blow-off top late this summer. Prices are up sharply following the election as they stand to benefit from several factors including a weaker dollar (extremely international sector), lowered threat of tax increases (one of the more highly taxed sectors), and a major bid for growth stocks following a murkier outlook for stimulus-related stocks. There is, however, still bipartisan appetite for increased regulation in the sector.
Price Action for Munis
Municipal bonds stood to gain from a Democratic sweep, as we wrote about in our LPL Research blog Why Munis May Want Joe Biden to Win. The lack of a Democratic sweep likely means a lesser chance of rising income taxes, which reduces the relative attractiveness of federal tax-free municipal bonds. Moreover, there is likely less money for state and local governments under a bipartisan, watered down stimulus bill than one constructed under a blue wave Congress. Still, lower rates are supporting price action today.
Healthcare Up
Major healthcare reform is one priority for which Biden likely would have needed to control both chambers of Congress in order to enact significant change. As the possibility for an all-blue Congress dims, healthcare is rallying as the threat of disruption to its industry subsides somewhat.
Renewable Energy
Perhaps the posterchild for the Democratic sweep trade, renewable energy stocks, which have seen a significant run-up since the end of September, were down sharply in the immediate election aftermath. Major climate-change spending initiatives would require sign-off from Congress, which is much less likely under a Republican Senate.
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