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Stocks Find Election Night Wings, but Winds of Change Known to Unglue Feathers

It could be days before the next president claims victory, but Wall Street has seemingly pushed all its chips into the prospect of a clear winner.

It could be days before the next president claims victory, but Wall Street has seemingly pushed all its chips into the prospect of a clear winner. 

Early ballot mailings, with address and barcode redacted, pictured in California. (Courthouse News photo/Barbara Leonard)

MANHATTAN (CN) — Markets rallied ahead of any election results on Tuesday but the mantra on Wall Street — that any volatility is bad volatility — could take shape if there is no clear winner in the hotly contested presidential election.

The volatility index, known colloquially as Wall Street’s fear index, began spiking up again at the end of October but is still well below the huge increases seen in late March and early April. The VIX has dropped only slightly in the last few days, a sign that traders are still somewhat nervous about a protracted presidential ballot battle.

“I suspect it will stay elevated for a while, especially if the vote count drags on and a clear winner is not declared by Wednesday at the latest,” said Michael Pagano, a finance professor at Villanova University.

In the short term, many believe a Trump reelection would be good for the markets while a Biden victory would likely lower them. No matter who wins, however, a dragged-out, no-holds-barred election fight is expected to rattle investors.

“If the race is decided by the verdict in a single state … and the margin is close (less than 1%), then both the Biden and Trump campaigns will send lawyers in to either end or extend mandatory recounts — and that’s how we’ll get a contested election and a worst-case scenario in the near term for stocks,” wrote Tom Essaye, president of The Sevens Report.

Volatility aside, markets kicked off Election Day with sizable gains, building off Monday’s bull rush. At the opening bell, the Dow Jones Industrial Average gained more than 300 points, at one point in the afternoon gaining more than 700 points. By the time trading ended for the day, however, the Dow settled at a 552-point, or 2%, increase.

The Nasdaq also posted sizeable early gains to settle at a 1.8% increase, exactly how the S&P 500 finished after a similar trajectory. 

Similar gains in markets abroad prefaced the day’s rally. Major indexes in China, Australia, and South Korea each hit nearly 2%, while Japan’s Nikkei finished the day’s trading up 1.4%. Stocks in Europe did even better, with the pan-European Stoxx 600 gaining 2.3% for the day, and markets in Germany and France posting even higher gains. 

“The upwards moves that were witnessed yesterday don’t appear to have been rooted in any particular fundamental story,” wrote David Madden, a market analyst at CMC Markets. “In a way, the bullish moves felt like a relief rally, as stocks slumped last week on the planned tighter restrictions for France and Germany, that will come into effect in this month, and now that November has arrived, there was a bounce back.”

Many investors seem to be banking on another Blue Wave, in which Democrats take the Senate.

Analysts at Goldman Sachs say the presidential election points strongly toward a Biden win, with Trump needing to win key Sun Belt states, as well as Pennsylvania, Michigan and Wisconsin. But one investor’s note from the bank’s chief economist, Jan Hatzius, said the Senate race is less clear.

“We have argued that the Senate majority is at least as important as the presidential election for fiscal policy in 2021,” Hatzius wrote, noting a larger Senate majority could lead to the elimination of the filibuster.

Hatzius had previously said that blue wave in 2020 would improve the chances of a stimulus package of $2 trillion or more passing in January shortly after Inauguration Day. Fellow Goldman Sachs analyst Lotfi Karoui wrote last month that, if Democrats take control of the White House and both chambers of Congress, “we see more pros than cons for credit markets.”

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A split government may actually be the most favorable outcome for Wall Street, some say.

According to an analysis by research firm CFRA, which has analyzed election and market data going back to 1945, equities perform best when Democrats control the White House but not Congress. The next best scenario, from Wall Street’s perspective, is a Democratic president but a Republican Congress. The worst scenario is a Republican president but a Democratic Congress.

Investors are most concerned about Congress’ inability to negotiate another stimulus package, particularly if Biden wins the White House but Democrats fail to take the Senate. 

“The elusive coronavirus stimulus package would probably be decided upon and delivered faster by a Trump win,” Madden wrote. “If there is a huge ‘blue wave,’ we might see the Democrats take control of the Senate as well as a Biden win, but if that is the case, we would probably be looking at 2021 before the stimulus program is deployed.”

The prospect of a Democratic-run government is promising for certain industries. “You can see rallies in sectors that are expected to do well in a Democratic regime, such as clean energy, utilities — which can benefit from clean energy by lowering costs — and health care,” Pagano said.

Conversely, defense contractors, banks, and oil and gas companies saw some declines. “Big Tech could also be hindered by greater scrutiny and regulation under a Biden administration, but this is counter-balanced by their underlying, secular growth trends as more economic activity is shifting to the digital economy,” he noted.

Much of Corporate America also has been fixated on the 2020 election. According to an analysis by FactSet, more than one-third of companies listed on the S&P 500 discussed the election during recent earnings calls with investors, far more than those companies discussed the last presidential election during the third quarter of 2016.

Tax policy, stimulus negotiations and regulations were the three biggest policy areas cited by companies when discussing the election. 

Other aspects of the market, such as commodities and currencies, will likely have a more nuanced reaction to tonight’s initial results. 

The U.S. dollar is expected to slide initially if Biden wins, but over the long term “some currencies will perform better under another Trump term and others under Biden,” wrote Kathy Lien, managing director of FX Strategy at BK Asset Management.

Lien noted that Biden would likely be friendlier to Canada and the European Union, which could cause the British pound to weaken and the Euro to overperform, she wrote, while Japan’s yen would benefit from a Trump victory. As with equities, a contested election could drive all of the risk currencies lower, she added.

Gold prices also rose on Tuesday due to less confidence in the U.S. dollar and worries about a protracted ballot-counting process. By 4 p.m. EST, gold was trading at $1,908 per ounce, a 0.8% increase for the day.

Traditionally, gold performance does not change based on who is in the White House, with gold returns topping 11% during Democratic presidencies and 10% during GOP presidencies, said Juan Carlos Artigas, head of research at the World Gold Council.

“The political landscape has been increasingly divisive over the past several years — in the U.S. and abroad — and investors are bracing for a potential period of even greater volatility,” Artigas said, noting the current “high-risk, low-rate” economic environment will likely prop up gold prices for the foreseeable future.

Gold could be attractive for investors no matter who wins the White House, others argue. If Biden wins, he may push for greater corporate and capital gains taxes, boosting gold’s status as an alternative investment, wrote analyst Desmond Leong of AXI Trader.

But if Trump wins, he would likely continue using tariffs, “which could heighten existing geopolitical tensions, resulting in a capital flight to safe-haven assets — such as gold — to ride out the storm,” Leong wrote.

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