Barita Insights: Weekly Newsletter November 9, 2020

Analyst Insights

Joe Biden will be the 46th President of the United States, after defeating incumbent Donald Trump in the 2020 United States presidential election. Now, investors and analyst alike are eager to determine how will the 2020 US presidential election results affect markets. Well, the presidential race is just one piece of this jigsaw puzzle. The legislative arm of government, Congress, comprises of the House and Senate, and is also up for contention. Under the Trump administration, the lower arm (the House) was majority democratic, and the upper arm (the Senate) was majority republican. This worked in favour of the Trump administration, allowing for swift passing of laws and legislation regarding matters such as corporate tax and tariffs. In this 2020 election, the democratic party have retained the majority in the House, but the Senate is still up for contention. This dilemma leaves us with two possible scenarios now that Biden has won; a democratic majority senate (Blue Wave) or a republican majority senate. Unfortunately, both scenarios are complimented with the possibility that Trump refuses to accept the results and will seek to bring the election results before the courts. This further complicates this election jigsaw puzzle. In this week’s issue, we will dissect the current developments and showcase outcomes based on the different scenarios, which will then be the driving force for our expectations of the global markets in the coming weeks.
First, we look at both scenarios,

  1. Scenario one (Democratic Congress): We expect the US markets to sell off, maybe between 2% to 4% and this is mainly due to the tax proposals of president-elect Biden during his campaign. The tax proposal would raise taxes on individuals with income above $400,000, including raising individual income, capital gains, and payroll taxes. Biden would also raise taxes on corporations by increasing the corporate income tax rate and imposing a corporate minimum book tax. Also, this scenario presents the best chance for a sizeable fiscal stimulus which will aid many business and individuals in need, while also having a spillover effect on emerging markets.
  2. Scenario two (Republicans win the Congress while the Democrats maintain the House): We believe markets will like this mainly because this presents divided government. Inherently a divided government means more prolonged deliberations for specific legislative actions and laws to be passed. Given the mandate of president-elect Joe Biden, this means his proposed tax plans will have an uphill battle to get passed, if passed at all; and we expect US securities market to rally from this. While the COVID-19 pandemic has not abated, this scenario also means a lower fiscal stimulus, which indirectly means potential a lower level of recovery for the US, the largest contributor to global GDP. According to a Hartford Funds survey; they found many people believe a Republican Congress (both House and Senate) leads to better market returns, however, history shows better performance tends to happen under a divided government.

Despite the two scenarios above, the short-term sentiment of the market will likely be influenced by Donald Trump’s decision refusal to concede to the result of the US election on Saturday. The Trump campaign has stated their intent to contest a number of the election results in states that were considered close and high volumes of “mail-in” ballots. Despite president-elect Biden accepting victory, a clear winner will not be officially declared until all these legal matters before the court are cleared, and the democracy of the US remains intact. The lawsuits filed by the Trump campaign mimics the legal theories of Bush vs Gore, the infamous supreme court case that decided the contested 2000 presidential election. While the Supreme court more than likely won’t settle the 2020 election, this will still likely increase volatility across markets.

What If This Election Ends in Another Bush v. Gore?

  1. History has shown us a week’s long vote recount hinges on technicalities created a swath of uncertainty and tanked stocks as much as 8.5% before the Supreme Court named Bush the victor on December 12.
  2. In addition, the VIX, which tracks volatility expectations, peaked in November before the election actually took place, and it didn’t peak again until weeks later as a result of the ongoing dot-com crash–long after the Supreme Court announced Bush the winner.
  3. The stock-market uncertainty tied to election results ultimately only lasted about three weeks; by December 4, the S&P 500 had returned to pre-election levels, and some sectors, such as defense and consumer staples, even saw a boost from the prospects of a Bush victory despite the broader rout.

“In 2000, there wasn’t widespread unrest in the country. This time, there is a risk that protests could get out of control,” Greg Valliere, a chief U.S. policy strategist at AGF Investments told CNN. In the event of a contested election that escalates beyond a one-to-two-week delay in results, we believe this would put tremendous pressure on the US stock market for the remainder of 2020.

The president-elect won’t be sworn in until January 20, 2021 which means there is still a lot that can happen in between now and then. So given these developments are like A Flip Of a Coin, we remain cognizant of market developments and ensure to position ourselves appropriately on both sides of the coin as any outcome is possible.

 

Written by Jonathan Cook, Research Analyst

Conclusions

Scenario one (Democratic Congress): We expect the US markets to sell off...

  • Scenario one (Democratic Congress): We expect the US markets to sell off, maybe between 2% to 4% and this is mainly due to the tax proposals of president-elect Biden during his campaign
  • Scenario two (Republicans win the Congress while the Democrats maintain the House): We believe markets will like this mainly because this presents divided government. History shows better performance tends to happen under a divided government.

In the event of a contested election...

In the event of a contested election that escalates beyond a one-to-two-week delay in results, we believe this would put tremendous pressure on the US stock market for the remainder of 2020.

The Federal Reserve held short-term borrowing rates near zero...

The Federal Reserve held short-term borrowing rates near zero in a decision Thursday that characterized the economy as growing but not near where it was before the coronavirus pandemic hit. As markets widely expected, the Fed kept its benchmark interest rate anchored in a range between 0%-0.25%, where it has been since an emergency cut seven months ago in the early days of the coronavirus pandemic. Chairman Jerome Powell noted, however, that he thinks the Fed still has plenty it can do to help the recovery.

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