Marius Paun | London, UK | Senior dealer | Thursday, 05th November 2020
Following almost two days of tense vote-counting, the US is yet to declare a winner for its Presidential election. Despite that, for the third day in a row, stocks have rallied.
Nasdaq 100 soared more than 4% yesterday with Dow Jones and S&P 500 also posting strong gains. The consensus is that investors are getting increasingly comfortable moving back into risky assets even with unfinished business regarding the election results. It appears Republicans might keep control of the Senate, so the Congress could remain divided between the two parties. Consequently, this will reduce the chances for a so-called ‘blue wave’ proposal to be signed into laws, independent of who’s going to be in the White House.
More specifically the threat of repealing Donal Trump’s tax cuts has been reduced. The tech giants like Apple, Amazon, Google, Facebook and Microsoft must have heaved a sigh of relief and could see ongoing strength as the prospect of increased regulations eased somewhat. Furthermore, the massive stimulus and infrastructure program promised by challenger Joe Biden could take a hit if the Republicans are still the majority in the Senate.
Before the elections, there were several polls that predicted Joe Biden will win with more than 10% advance on a national level, a ‘blue wave’ sweep with Democrats having a good chance of getting everything. It turned out it wasn’t a landslide with the big surprise being how well Trump has done, even if he loses. At the time of writing, Joe Biden has 264 votes of the 270 needed to declare victory, compared with Donald Trump at 214. Biden claimed Wisconsin and Michigan on a rather thin advantage, which seems to be the case for the rest of the swing states. Trump has already asked for recounts in Pennsylvania and Michigan on alleged fraud although he has not provided evidence. So a string of lawsuits are likely, which could prolong the uncertainty.
Nonetheless, investors seem optimistic so far that despite the winner of the Presidential election is still too close to call in the swing states, the status quo in the Congress is likely to remain in place for the next year. In turn, any tax increases or any disruptive policy changes that could negatively affect businesses are now less likely. It’s true that eventually a winner will be called but if history is any guidance, stocks tend to do well in the year post Presidential election regardless of which party gave the incumbent.
On Friday, all eyes will be on the non-farm payrolls report with the expectations for another 600,000 jobs created last month (an extra 650,000 jobs form the private sector and a loss of 50,000 from the public).
The downside in all this saga is that the fiscal stimulus might not arrive as quickly as the markets hoped before the election. Regardless of the winner, legal challenges are almost certain to follow given the very slim margins in a number of states. Civil unrest is also a distinct possibility and the particularities of voting systems for individual states could delay the overall result, possibly for weeks, some even say months. It’s definitely the worst-case scenario everyone was hoping to avoid, reminiscent of the Bush vs Gore battle in 2000.
Markets were hoping for a fiscal stimulus sooner rather than later. It’s not that it will not happen but the timing could become a problem. With no one party clearly in charge, a compromise needs to be reached in order for the stimulus to get through the US Congress. The Financial Times already reported ‘with a Republican Senate there will be a sort of economic status quo, dominated by monetary policy or a Biden versus Mitch McConnel (Republican leader in the Senate) clash with fiscal policy becoming even more frugal’.
The Fed Chair Jerome Powell may be left propping the markets yet again in the absence of fiscal policy doing its bit. He already said there’s help if needed from his side even if he encouraged more spending from the government to complement that. Where it might become interesting is if the Fed would start to contemplate negative interest rates as the European counterparts?
Once again Nasdaq recovered after the selloff seen in the last two weeks of October from a high of 12,257 after finding support at the 50% Fibonacci retracement at 10,920. The price has crossed back above the moving averages with both indicators now pointing upwards again.
The recovery was even steeper than the initial drop with most of the gains seen in the last three sessions. Bulls have retaken control and will look for a close above resistance turned support at 11,750 which has been surpassed earlier today. If that level holds, more buyers could get confident the rally has legs and push for 12,185 and ultimately retest the all-time high of 12,468 reached on September 02nd. On the downside, bears will need a close below support just under 11,800. That could open the door for testing support at 11,700.