US Election: Markets hold their nerve despite uncertainty

Markets reassuringly stable - for now

“Even as the odds of a contested outcome have risen overnight, markets have remained relatively calm,” notes Andrew Hunter from Capital Economics.

That may start to change if the delay is prolonged further, and volatility starts to bite.

“For now, no clear result is probably the worst possible outcome from an economic perspective as uncertainty increases and stimulus hopes fade,” argues Keith Wade, Chief Economist at Schroders, who manage the St. James’s Place Managed Growth fund.

If a winner is declared relatively soon, markets will then be focused on the fiscal stimulus bill that should follow the election. But given the likelihood of a split Congress, that may be some time away.

“We should expect more short-term market volatility,” commented Robert Jukes, Chief Investment Officer at Rowan Dartington. “When the dust settles, and the divisive election politics dissipates, hopes will turn once again to fiscal stimulus and that, in the end, may support equities through the uncertainty,” he adds.

Despite the temptation to correlate the election results with stock markets, long-term investors should avoid focusing too much on market behaviour in election week.

“Every market move is followed by a headline trying to understand what that implies for the election results,” says economist Jeffrey Cleveland from Paygen & Rygel, co-managers of the St. James’s Place Multi Asset fund. “Our advice is to not read too much into intra-day movements and take a longer view.”

Economists suggest that the reaction of the Federal Reserve will also influence markets in the near term.

“The actions of the Fed are often at least as important as those of the White House,” says Neil Ferguson, Chief Group Economist at Capital Economics.

“In this respect, the question is not so much whether or by how much fiscal policy will be loosened under the next president, but the extent to which this will be accommodated by the Fed,” he continues.

“We believe the Fed will continue to pursue policies that keep real rates in negative territory as the US economy continues its slow recovery from the pandemic shock, in which case equity markets should perform well under either a Biden or Trump administration over the coming years.”

What this means for investors

Republicans’ hold on the Senate means that, if Biden is elected president, he is likely to face several challenges passing his economic and political agenda.

In the short-term, this may put a gridlock on a stimulus bill, or result in a package smaller than originally planned by Democrats.

“That said, even a ‘watered-down’ fiscal deal could total $1.5 trillion, a huge sum by any measure,” suggests Jeffrey Cleveland.

But in the medium to longer-term, a divided government may not be the worst outcome for investors.

“A split Congress has historically been the best environment for equities,” notes Cleveland. “A Biden-led divided government offers up less chaos on the international trade front, but the Republican-controlled Senate would stop tax increases,” he adds.

“Overall, this divided government mix is a good backdrop for ‘risk assets’ and likely means a weaker US dollar.”

A Biden win with a split Congress also shifts the outlook for different sectors of the US economy. It’s now less probable that policy changes will impact the energy and healthcare stocks, and tax rises that could affect large US companies will be extremely difficult for Democrats to pass through the Senate.

“Breakup of Big Tech is off the agenda,” suggests Mark Anderson, CIO at BlueBay, who co-manage the St. James’s Place Strategic Income fund.

A nation divided, and in the dark

The narrow margins in key swing states suggests that pollsters – who were forecasting a Biden sweep - understated support for the Republican party, and overstated the popularity of the Democrats.

Turnout this year was the highest in over a century, thanks in part to the major increase in postal voting. Trump has received more votes than in 2016, while Biden has broken the popular-vote record.

The election has revealed a nation bitterly divided.

Legal challenges, vote recounts and a likely split Congress suggest that political warfare will continue long after ballot boxes have been cleared away. Regardless of whether he remains in office or not, turnout for the President implies that ‘Trumpism’ is still the ideology of many American voters, and may stay around for some time to come.

Exit polls showed that voters thought the economy was more important than public health. But with coronavirus cases still rising rapidly in the US, the president-elect will find himself walking a tightrope between restarting the country’s economic recovery and preventing many more COVID-19 casualties.

For investors, as always, a focus on the long-term horizon – years rather than weeks – will serve as far better advice to navigate the noise of the next few days.

“Whatever the outcome is, the election is behind us,” argues Mark Anderson, adding: “The next big event is the development of a vaccine, alongside further fiscal and monetary stimulus.”

BlueBay, Paygen & Rygel and Schroders are fund managers for St. James’s Place. Where the views and opinions of our fund managers have been quoted these are not necessarily held by St. James's Place Wealth Management.

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