In the weeks preceding the US presidential election, the stock market was pricing in the potential for large fiscal spending. The anticipation of a blue wave election, wherein democrats win control of Congress and the presidency, caused longer-term treasury bond yields to move higher—the curve steepened—and there was rotation from growth and technology stocks to more cyclical reflation plays.
However, post-election, that trade reversed course somewhat with bond yields slipping 10 basis points on November 4, 2020, reaching a two-week low—prices increased—and cyclical stocks sold off while technology and health care rallied.
On November 5, stocks are mostly up across the board, and Wall Street seems to be pricing in the prospects of a divided government with a republican-controlled Senate.
Senate and House Control
The working assumption is that, regardless of who wins The White House, a democratic House and republican Senate would mean a smaller stimulus package—$1 trillion–$1.5 trillion, versus $4 trillion—and more limited infrastructure spending. This is important because the market had bid up construction and industrial companies, betting that a blue wave would mean a large infrastructure bill to fix roads, bridges, and highways.
However, on November 4, those infrastructure-oriented stocks reversed course, trading lower, while technology favorites like Google, Facebook, Amazon, Microsoft, Apple, and Nvidia made strong gains, repricing some of the previous posturing.
The outperformance of the technology-heavy NASDAQ and rally in bond prices—or lower yields—can be attribute to several factors.
- Defensive trade purchases. In times of uncertainty investors tend to buy bonds, gold, and what may be the new defensive trade—which is currently technology—parking wealth in firms with the best chance of posting regular growth during a period of economic uncertainty.
- Tech regulation. With split control of the two houses of Congress, big tech may be less likely to be broken up for monopoly practices, as some Senate democrats want, or for suppressing political speech, as some republican Senators want.
- Spending gridlock. Bond yields decreased as investors who were initially looking for a large stimulus package began looking for potential gridlock on spending and slower growth—making companies with growth and more-certain fundamentals more attractive.
- Taxes. Positive for stocks, there’s generally a lower perceived chance of republican tax cuts getting repealed now that the Senate is likely controlled by the republican party. If former Vice President Joe Biden wins, there could be some additional support from less-hawkish trade policy.
- Capital-gain fears. Prospects for major selling of these big tech winners due to capital-gain fears has diminished with the prospect of these new leadership dynamics.
- Long-duration asset valuations. Lower rates imply higher valuations for long-duration assets, like high-growth companies, when valued on a discounted cash-flow basis.
Traders and investors are getting increasingly confident that republicans will hold the Senate and democrats will hold the House of Representatives. From a markets standpoint, that means whoever emerges with White House control—President Donald Trump or former Vice President Joe Biden—may not be able to make dramatic changes in taxes or spending.
The markets will continue to process new information as it comes in, and there will likely be more volatility. However, for now, it appears the markets have priced in some comfort with either candidate in the presidential race, given the more-likely outcome of a split Congress.
It’s important to continue moving towards geographic and sector diversification. Taking into account risk tolerance and investment objectives, it will likely be beneficial to stay the course—a diversified portfolio and long-time horizon can give comfort in the midst of short-term volatility.
We’re Here to Help
If you have any questions about market changes or next steps, contact your Moss Adams advisor or Michelle Walker, Director of Investment Strategy, at firstname.lastname@example.org.
For additional insight, join our webcast on November 19. Dan Clifton, a Washington DC-based policy strategist, will share his perspective on the election results, how policy will impact financial markets, and the post-election outlook for various sectors.