Ethenea: The longer the uncertainty continues, the greater the likelihood of a negative market reaction

Ethenea: The longer the uncertainty continues, the greater the likelihood of a negative market reaction

November 6, 2020

United States Politics
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Andrea Siviero, Investment Strategist at ETHENEA Independent Investors, gives his assessment of the US election and its impact on the financial markets.

In the US, votes are still being counted and this is expected to continue throughout the day, and possibly even until tomorrow. It is unlikely that we will have a result this evening or even tomorrow morning. However, given the likelihood of litigation, a definitive result may be days or even weeks away.

Currently, presidential candidate Joe Biden has a (slight) lead in a few battleground states, is catching up in others, and seems very close to reaching the 270 electoral votes needed to be elected president. However, the Republicans are still hoping to win in battleground states and the Trump camp has already filed a number of lawsuits in some states.

So far, this uncertainty about the protracted and unclear outcome of the elections has not had a negative impact on the markets. On the contrary, after last week's correction, stock markets around the world boomed, supported by falling yields.

For the time being, we are still experiencing a tough but normal process and, so far, we are not seeing any unusually strong market reactions. However, in the event of a contested outcome and lengthy litigation, the ongoing uncertainty could well have a negative impact on risky asset classes and cause a market correction. Moreover, the longer the uncertainty continues, the greater the likelihood of a negative market reaction. While the market predicted a clearer victory for the Democrats last week, it is currently positioning itself for a Biden presidency with a split Congress.

What does this mean for the markets? Historically, US equities have performed best under a Democratic president and a split Congress, with an average annual return of 13.4 percent. We will see fiscal stimulus under Biden, even if it is smaller than it would have been under a ‘blue wave’ for the Democrats. This is positive for US Treasuries and would lead to falling yields, which in turn is good for equity markets.

With a Biden presidency, we expect fiscal incentives to support US companies. In addition, an infrastructure programme could support industrial companies, which should lead to a narrowing of spreads. Furthermore, it will be difficult for the Biden government to reverse the Trump government's tax cut or introduce new taxes, for example on technology companies. This is positive for the stock market and the Nasdaq.

Another important factor is that a less controversial international approach by a new government could also provide less support for a strong US dollar. Moreover, Biden as president is likely to be less aggressive towards international partners and China.

In the event of a Trump presidency, also with a split Congress, the effects on the markets are likely to be similar. Although a new Trump administration would be more business-friendly than a Biden administration, the former would be much more unpredictable in terms of international relations.

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