Global Weekly Commentary: Investing after the U.S. election
Market trends reinforced
A Democratic victory without Senate control is for now reinforcing existing market trends such as the hunt for yield and growth stocks.
A resurgence of Covid-19 cases has led to new national lockdowns in Europe, threatening to weigh on mobility and activity in the near term.
Data from the euro area and U.S. could shed light on the impact of the virus resurgence and new lockdown measures on the economic restart.
Joe Biden’s victory in the presidential race likely ushers in a near-term market environment dominated by low rates, a hunt for yield and growth stocks. A Democratic takeover of the Senate looks unlikely, which would constrain the Biden administration’s ability to implement large-scale fiscal stimulus and public investment, tax, healthcare and climate related legislation.
Chart of the week
U.S. 2020 presidential election Electoral College votes by state
Sources: BlackRock Investment Institute, with data from the Associated Press (AP) and New York Times as of Nov. 8, 2020. Notes: The map shows the projected winner of the U.S. presidential election in each state, as well as the states’ Electoral College votes. Solid blue and red hexagons represent the states where a winner has been called. Pale blue and pale red hexagons represent states where the results have not been called. Blue represents Biden and red represents Trump.
President-elect Biden flipped the key states of Michigan, Wisconsin and Pennsylvania, giving him more than the needed 270 electoral votes to win the White House. See the chart above. We see the likelihood that recounts and legal challenges could overturn this outcome as remote and favor looking through any resulting market volatility. Democrats’ effort to take control of the Senate has met roadblocks. Two Senate seats in Georgia are headed for a January runoff election, giving Democrats a narrow path to winning both and yielding a 50-50 Senate, with the vice president as the tie breaker. A divided government – with Republicans retaining their control of the Senate – could see greater regulation for many sectors, but big-ticket legislative actions including large-scale fiscal stimulus and public investment, tax, healthcare and climate related legislation would likely face insurmountable hurdles.
Fiscal policy is critical for preventing permanent economic damage from the virus shock. Some fiscal relief looks possible in the near term during the lame-duck session of Congress, but we see the scope and size of fiscal stimulus and public investment as much more modest than what a united Democratic government might deliver. We’re monitoring the fiscal response closely, as a premature retrenchment could set back an economic restart that has so far surprised to the upside. Taxation policies would likely stay steady under a Republican Senate. Long-term U.S. Treasury yields had run up ahead of Election Day in anticipation of a Democratic sweep, bringing forward a rise in yields we expect to see in a higher inflation regime in the medium term. The prospect of a divided government removed the accelerant and brought yields down for now. Yet we still expect yields to slowly move up over the next few years, boding well for risk assets, especially for credit and growth companies that have dominated markets for much of the post-crisis period.
A Biden win likely signifies a return to more predictable trade and foreign policy. We believe emerging market (EM) assets should perform on improved trade sentiment, especially in Asia ex-Japan. In addition, many Asian countries have managed to contain the virus and are ahead in the economic restart. Yet we see U.S.-China rivalry staying structurally elevated across technology, trade and investment, due to bipartisan support for a more competitive stance on China. We also see an increased focus on sustainability under a divided government through regulatory actions, rather than via tax policy or spending on green infrastructure, and a rejoining of the Paris Agreement to combat climate change.
The bottom line: A Biden divided government would bring significant changes in foreign policy and regulation – both in substance and tone. Yet the legislative agenda would be constrained, taking off the table the more transformative scenarios being contemplated ahead of the election. The likely implication: continuity in the market environment. We expect the quality style factor and large-cap equities to perform strongly – as they have often done in the past. Large-cap tech stocks have led the post-election rally, yet we note they would face regulatory pressure even under a divided government. We are reviewing our tactical asset views in light of the election result. Other key inputs include the evolution of the virus shock and the timeline for a vaccine – and their potential to bring forward market expectations of inflation and change equity market leadership to cyclicals.
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