Why have the markets welcomed the hotly disputed US elections?
At the time of writing (November 5, 2020), the US elections seem to have set Joe Biden on the path to the White House, although without a majority in the Senate. The much hoped-for by some – and much feared by others – Democrat blue wave did not materialize. The set-up we are now likely to see – with one party in the White House and the other leading the Senate – will curb the transformative changes planned by the Democrats, which include a jump in public spending financed partly by a corporation tax hike. It also makes it more difficult to wave through fresh regulation for the healthcare sector and reduces the likelihood of a change in US anti-trust laws on the digital sector, although not wiping this possibility out completely. Therefore we should not be surprised that the election result was welcomed by Wall Street and the US treasuries market, although stocks previously buoyed by expectations of a hefty infrastructure program have plunged sharply again (cf. chart 1).
The US elections have had a hefty impact on the financial markets
Base 100 on October 20 / 10-year Treasury yield
Lastly on markets elsewhere in the world, the prospect of Donald Trump vacating the White House comes as good news and means that uncertainty on world trade would diminish. Joe Biden will maintain a very firm stance with China, but he is very unlikely to use border duties as a weapon to settle his differences with his fellow leaders. With Asia and the entire southern hemisphere enjoying a much better health situation than the west, the US elections further brighten the economic outlook. Meanwhile, the relationship with Europe would be much less strained, while Joe Biden is also set to get the United States back at the table on international climate agreements.
A set-up with a Democrat in the White House and Republicans holding the Senate should not hinder the roll-out of economic stimulus programs, particularly as the Covid-19 epidemic is picking up again in a number of Republican states (cf. chart 2). However, both the timing and size of these rescue packages remain unclear. Joe Biden’s inauguration would take place on January 20, 2021, but measures could be taken at an earlier date. Republicans in the Senate were calling for a $500bn plan ahead of the elections vs. more than $2 trillion the Democrats were pushing for: after some hesitation, Donald Trump ended up pledging figures that were higher than Democrat proposals.
Republican states are particularly hard hit by the renewed surge in the epidemic
Number of Covid-19 hospitalizations per state
Median for main Republican states / Median for main Democrat states
Debates on the next stimulus program will be particularly crucial for the markets as robust 3Q GDP figures and recent business surveys have proven just how effective state aid truly is. Contrary to concerns from most forecasting bodies, consumer spending in developed markets recovered sharply after we emerged from the spring’s lockdown shock. US household income actually increased during the crisis and consumers turned to manufactured goods (cf. chart 3) in the absence of access to certain services (leisure, restaurants, tourism, etc.), thereby providing a boost for manufacturing.
US consumer spending – goods vs. services
Services / Goods
We also saw indications of this much more buoyant economy than expected in Europe, where 3Q GDP stats put in much higher showings than projected, as the euro area notched up figures that the OECD’s June projections had not expected until 2022 (cf. chart 4). This is all very encouraging at a time when a great number of western economies are bracing for another drastic slowdown due to fresh restrictions being rolled out to rein in the health crisis and curb pressure on hospitals. If economic policy is skillfully steered, then the next post-lockdown period will fuel a strong recovery once more, pending the arrival of treatments and vaccines that are currently in the final stages of their trials right now. With sufficiently expansionary macroeconomic policy and progress on the epidemic, the economy has a good chance of making up the ground lost in 2020 much more quickly than expected in 2021.
Economic activity recovered much more than expected after spring lockdown
Base 100 in 4Q 2019
US GDP / Scenario expected by OECD in June 2020
French GDP / Scenario expected by OECD in June 2020
Meanwhile for investors, these figures put the disappointment triggered by the effects of the fresh Covid-19 surge in Europe and the United States into perspective. In our portfolios, we have increased our exposure rates in response to the US election. In our international funds, we have particularly upped our exposure to emerging economies, the Nasdaq and the world manufacturing sector. Risk scenarios for the weeks ahead include the possibility that the election results could be challenged, with the ensuing chaos, and an overly abrupt shutdown in the country’s economy to tackle the epidemic. Conversely, vaccines may be authorized for market sooner than expected, which would drive a strong rally for the most cyclical sectors.