InvestmentsNov 13 2020

US markets rise as political gridlock ensues

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US markets rise as political gridlock ensues
Joe Biden, president-elect of the US

Markets have been calmed by the US election ending in political gridlock, with Joe Biden preparing for the White House and likely to face a Republican-run Senate.

The world was kept on edge last week as the US presidential vote went down to the wire and the results of just a handful of battleground states held the election in the balance up until Friday afternoon.

But after pulling ahead in Georgia and Pennsylvania, and already leading the votes in Arizona and Nebraska, Democrat challenger Mr Biden’s path to the White House seemed clear and he claimed victory over incumbent Donald Trump.

Votes cast for the Senate were equally tense. The balance of power in upper Congress may be decided by run-off elections in Georgia, with no clear winner named until January after no candidate in either race polled 50 per cent or more as required by state law.

Such run-off elections, effectively a second vote, would be held in early January.

However, the Republicans are likely to retain control of the Senate as they currently hold a 53 to 47 majority, meaning the Georgian Democrat candidates would need to gain both contested seats to lead to a 50-50 tie in the house.

Measured markets

According to analysts and fund managers, the political gridlock caused when the Presidency and the Senate have different political parties at their respective helms is a positive as far as markets are concerned.

The divided powers will create difficulties for a Biden presidency and more radical policy measures will struggle to reach fruition.

For markets, this means a continuation of the status quo, limited corporate tax hikes and potentially a softer touch for technology.

Tom Boyle, market strategist at Atlantic House, said: “Although a split Congress may be seen to some as a negative, the market should take this as a positive.

“The more radical policy measures of either side of the aisle are likely to be reined in and a more bipartisan approach will be needed to get business done in Washington.”

When US markets closed yesterday (November 12), the S&P 500 was up 5 per cent since election day (November 3) while the Nasdaq index had climbed a similar amount.

The US's blue chip index has also been boosted by this week's vaccine hopes, although less so than other countries. Global markets rallied on Monday (November 9) when developers Pfizer and BioNTech announced that preliminary analysis showed their vaccine was 90 per cent effective in their latest round of trials.

Jon Adams, senior investment strategist at BMO GAM, agreed, saying a Biden presidency and a Republican-leaning Senate would see “gridlock ensure” on major policy initiatives.

He said: “A moderate Senate would put an effective halt to Mr Biden’s major tax and health care proposals.

“Similarly, Mr Biden’s enormous spending package – $5tn (£3.8tn) over 10 years – is likely reduced in the face of a Republican-controlled Senate.”

A smaller stimulus package would be good news for the technology stocks at the driving force of the US market’s rally over the past few years, as less stimulus will mean there is a smaller possibility of extra cash reinflating the economy and, in turn, value stocks and quality growth stocks such as tech are likely to prosper.

On top of this, a Republican senate is likely to block any heavy regulation of the technology sector.

The price of such companies reacted to the news. Shares in Facebook were up 10 per cent when markets closed for the weekend, while Amazon, Apple and Alphabet all enjoyed around 7 per cent boosts when the Republicans’ hold of the Senate became clear.

According to Nuveen’s global investment committee, the strong prospect of a divided government has produced a “benign outcome” for financial markets, which have “never minded political gridlock”.

The VIX index, which measures equity market volatility, fell from 35 to 30 per cent overnight on Tuesday 3 to Wednesday 4, despite the ongoing uncertainty surrounding the races.

Where was the ‘worst-case scenario’?

The prospect of a dividend Congress and a win for Mr Biden was enough to calm markets even while they faced what many analysts described as a “worst-case scenario”.

In the lead-up to the election, experts had said a close-call election disputed by Mr Trump would be the “worst case” for investors as any lingering uncertainty would be disruptive for markets.

But markets have remained resilient despite Mr Trump making numerous claims of voter fraud and “tremendous corruption” in the mail-in ballots and filing a number of lawsuits alleging such “irregularities” in several states. As at the time of writing, no evidence of such fraud has come to light.

According to LGIM’s Christopher Teschmacher, a multi-asset fund manager, investors and politicians alike were unlikely to take such calls seriously enough to have a major impact.

He said: “Contested elections remain important for markets, but the chances that investors take them seriously are reducing rapidly.

“Mr Trump’s fraud allegations do not seem to be gaining traction with the Republican mainstream. The public’s reaction is also important, but so far protests around the efforts to disrupt recounts appeared to have been relatively tame.”

imogen.tew@ft.com

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