Markets and the Election

Now that we are on the other side of the election, despite the uncertainty overhang with the looming result challenges, the financial markets have largely absorbed most of the news and seem to be indifferent to who wins at the top of ticket. Historically, financial markets have tended to favor a divided government. One where neither party holds a full control of both the House and Senate.

As of this print, Joe Biden is projected to win and take office in January 2021. In light of this and given the backdrop of financial market performance thus far in 2020, here are a few big picture policy issues we expect to influence market performance under a new administration:

Tax Reform
Assuming a Republican controlled Senate, it is unlikely we will see sweeping tax reform. Under Biden’s plan, there are significant tax increases on the table from doubling the capital gains tax rate for high earners (>$1m in annual income) to increasing the top income tax bracket to 39.6%. Further, the SALT deduction cap is on the docket for repeal in the larger state economies like CA, IL, NY, NJ, MA, and MD and if successful would decrease the tax bill for several higher earners. However, as the current balance of power sits today, it is unlikely sweeping tax reform will take place with a Democrat controlled House and a Republican controlled Senate.

Trade and Foreign Policy
It is expected the new administration will be less adversarial as it relates to international trade and foreign investment with a focus on more global cooperation especially in European markets. However, it is probable that import tariffs, mainly those with China, will remain in place. Fiscal and Monetary Policy

Fiscal Policy
All eyes are focused on the stimulus package negotiations as means for near-term support of the nearly 11 million unemployed workers. This is by far the largest overhang on investor sentiment as it would be the biggest impact on cyclical sectors barring an approved coronavirus vaccine. Expectations for a relief package are not “if” but “when” and how much. As of now, it will not likely get passed until January with total size expected to be between $500 billion- and $1 trillion a bit less than the $2- $3 trillion targeted as part of the Democrat proposals.

Financial Market Impacts

With the election buildup having peaked and now moving into the rearview, financial markets appear to be looking forward and shifting focus on measurable fundamentals like valuation, economic indicators, and demographics. We believe this points to rational behavior among investors as it is these factors driving long-term investment returns, regardless of the federal government breakdown of power.

One area of notable movement was the drop in the 10-year U.S. Treasury yield, closing at 0.90% on Election Day, then falling below 0.80% the following day, and spiking toward 1.0% in the week following the election. We chalk this up to a flight to safe assets during times of uncertainty.

As previously mentioned, the prospect of divided government seems to have had a benign influence on financial markets. In fact, the VIX Index, a measure of equity market volatility, fell after the election despite the uncertainty around the actual results. Should a Democratic controlled Senate come to pass in January, we would expect more volatility to the downside. However, absent a major upset, we see the near-term risks outweighed by the longer-term outlook for growth and recovery.