Uncommon Truths - Is gridlock good for stocks?
Paul Jackson. Global Head of Asset Allocation Research and András Vig. Multi Asset Strategist
US election outcomes remains unclear but it looks as though a Biden presidency will face a divided Congress. Market reaction suggests this will get the best out of Joe Biden, while avoiding the worst. We agree but worry about volatility (both short term and due to occasional gridlock issues).
At the time of writing, it looks as though Joe Biden will be the next president of the US, that the House of Representatives will be Democrat and that the Senate will be Republican. Amazingly, after four full days of counting, we cannot be 100% certain about any of those predictions (especially given the legal challenges mounted by President Trump).
However, equity markets have opined on this outcome and they like it. The S&P 500 has gained 4.2% since it closed on election day and is very close to its all-time high. The NASDAQ Composite index has done even better, with a gain of 6.6% since election day, again bringing it close to an all-time high. Who would have guessed Joe Biden would be so popular?
Of course, the real positive for equity markets is not so much that Biden will be president (though we believe there are some positive elements to that, as explained later). Rather, it is the belief that most of his potentially market damaging initiatives will be blocked by a Republican Senate. For now, markets are viewing the previously dreaded “gridlock” through a Panglossian “checks and balances” prism.
That may not always be the case, especially when it comes to matters fiscal. We expect a return to debt ceiling battles, which could be problematic if a Covidweakened economy needs support. See, for example, the recent stalemate in which the $2.2 trillion fiscal package proposed by the Democrat House was blocked for being too generous by the White House and the Republican Senate. This is even more problematic in a world where central banks appear able to prevent financial market meltdown but struggle to engineer a positive economic stimulus (by the way, the Fed made no changes to its policy stance at its scheduled post-election meeting).
What does history tell us about stock markets and the balance of power?
