The election of Joe Biden to be the 46th president of the United States and progress on a COVID-19 vaccine and antibody treatment propelled a market rally in which leadership rotated to segments of the economy hardest-hit by the pandemic.
Investors welcomed the close but definitive result of the presidential election. Despite President Donald Trump’s attempts to challenge election results, the market consensus is that recounts and court cases will be resolved without changing the results or creating a crisis.
Investors also appeared to embrace the prospect of a divided Congress as Democrats fell short of the “blue wave” anticipated in the weeks leading up to the election. The GOP gained seats in the House of Representatives, narrowing the Democratic majority. Control of the Senate will be decided by two runoff elections in Georgia on Jan. 5, with the GOP favored to win at least one of the two seats and retain a narrow majority in the Senate. If the Democrats win both Georgia Senate seats, each party will hold 50 seats and Vice President Kamala Harris would have the tie-breaking vote.
With a GOP majority or razor-thin Democratic “control” of the Senate, the progressive wing of the Democratic Party faces long odds against their policy priorities for at least the next two years. Although limited tax increases could be tacked onto an infrastructure bill that gains bipartisan support, a huge tax hike is probably off the table unless Democrats can pull off both victories in Georgia runoff elections and decide to jettison the Senate filibuster. Biden probably will also need to scale back spending plans for pandemic relief and stimulus given resistance from GOP leadership.
Election results, and optimism about the long-term prospects for containing COVID-19, influence the outlook for many segments of the market:
- Technology: Investors became more optimistic about the timing and pace of economic reopening because of the better-than-expected early COVID-19 vaccine study results from Pfizer, and emergency use approval of an Eli Lilly antibody treatment. Long-term interest rates rose in reaction to improved growth expectations, with the rise a reminder that lower-for-longer rate assumptions created by the COVID-19 pandemic does not mean that rates will remain near zero forever. The brief interruption in the technology stock rally reflects the reality that even small increases in interest rates can wreak havoc on the valuation of growth stocks.Biden’s election, however, is mostly a favorable development for technology companies. From a policy perspective, the most punitive outcomes for antitrust targets Facebook, Apple, Amazon and Google are probably off the table with the election of Biden. Technology companies will continue to benefit from the trends that fueled their rise, but rising interest rates, lofty valuations, scrutiny from regulators in the U.S. and Europe, and increasing competition may slow their rate of growth.
- Financials: Banks would be big winners from economic reopening and a steeper yield curve. An economic recovery would allow banks to release some of the hefty provisions against bad loans built up this year, while modestly steeper yield curves would boost net interest margins.Biden has historically been friendly to financial institutions, and Wall Street generally supported his campaign, but it remains unclear how much influence prominent Wall Street critics such Sens. Elizabeth Warren and Bernie Sanders will have in the Biden administration.
- Infrastructure: If there is one point of agreement between both parties, it is the need for reinvestment in U.S. transportation, maritime and aerospace infrastructure. Rural broadband access is another bipartisan priority. Consequently, infrastructure spending should be an early opportunity for Biden to show that he can “reach across the aisle” to forge bipartisan agreements.Biden will also support the transition to a cleaner energy infrastructure through executive action, reversing the deregulatory moves under President Trump. Biden could implement significant policy changes by issuing directives to regulatory agencies and other government departments, including tightening auto emissions and power plant standards and re-regulating methane leaks. Alternative energy stocks have already rallied in anticipation of a Biden presidency, so potential post-election upside for renewables may be less than expected.
- International stocks: European companies may have faced an increase in tariffs and trade sanctions if Trump had been reelected. European stocks should benefit from an easier trade environment and a more predictable and collaborative U.S. approach to foreign relations. A recovering global economy would also boost European stocks, which tend to be more export-driven and economically sensitive than U.S. stocks.Tensions between the U.S. and China are likely to persist, but policy toward China will take on a more predictable arc and involve a greater degree of multilateral cooperation. Investors will welcome a less idiosyncratic approach to policy, but the trend toward de-globalization and rivalry with China will continue under Biden.
- Bonds: Bond investors are relieved that large spending increases are likely to be off the table. However, long-term interest rates may rise alongside progress on containing the pandemic and restoring economic growth. Corporate bonds could benefit from an economic recovery, though bonds in troubled segments of the economy will remain under scrutiny by investors until a vaccine is more widely available.
A strong health solution to the COVID-19 crisis is a precondition for the global economy to achieve a sustainable recovery, and there is a danger that investors and political leaders declare victory too soon in the battle to contain the pandemic. The path from promising early results for COVID-19 vaccines and treatments to approval for general use, mass production and distribution is a long one, with potential obstacles at each step along the way.