Unanswered election questions and why forecasters expect stocks to rise: Morning Brief

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Monday, November 9, 2020

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Although uncertainty persists, there were no surprises that rocked the market

Joe Biden won the 2020 presidential election, the PA screened on Saturday. So we can now designate the former vice-president as president-elect.

For investors, this removes some uncertainty. However, two important questions remain unanswered: 1) what will be the outcome of President Trump’s contested votes, and 2) will the next president be working with a divided Congress or the so-called “blue wave”? will it materialize? .

The good news for investors is that these exceptional risks reflect scenarios that have been known for weeks, if not months. In other words, the latest came with no unlikely black swan-like outcome that would lead to a major asset revaluation by investors.

As for Trump challenging the vote, his administration has already filed several lawsuits aimed at overturning the vote results in the states that surrendered to Biden. An election challenged by Trump is a long-known risk, leading a number of Wall Street strategists to view it as part of their expected base scenario. And so, the fact that the president has yet to concede is no surprise to the markets. That said, Trump is not getting much trcourt action and experts largely agree that the administration’s demands lack the merit that would lead to a reversal of the results.

As for the make-up of Congress, it’s a little more interesting as Democrats and Republicans each control 48 Senate seats. And the tiebreaker comes down to the outcome of the Georgia Senate race, which heads to a runoff on Jan.5.

“Although the likelihood of the two Georgian Senate seats moving from Republican to Democratic control seems low, the markets are indicating that the odds are increasing,” Goldman Sachs’ David Kostin wrote on Friday. “The market odds of predictions of a Democratic sweep fell from 51% to 9% on election day, but have since risen to 23%.

In other words, we must prepare for a divided Congress.

President-elect Joe Biden, right, on stage with Vice President-elect Kamala Harris, left, Saturday, November 7, 2020, in Wilmington, Del. (AP Photo / Andrew Harnik, Pool)

“A divided government would limit the ability of the Biden administration to implement large-scale fiscal stimulus packages and legislation relating to public investment, taxation, health care and the climate,” wrote on Saturday after- noon analysts from the BlackRock Investment Institute. “We are seeing an increased focus on sustainability under a divided government, but through regulatory measures, rather than through fiscal policy or spending on green infrastructure. It would likely also mean a return to more predictable trade and foreign policy – although rivalry between the United States and China is expected to remain high due to bipartisan support for a more competitive position.

All plausible scenarios suggest stocks will continue to rise

We must note that most experts agree that the makeup of Congress will not determine whether stocks go up or down. Rather, they see it as an increase in inventory to varying degrees. Indeed, there is hardly any election scenario that market forecasters dislike.

A split government result is part of the reason Jefferies’ Sean Darby sees the S&P 500 (^ GSPC) hit 3,750 in 2021.

“While we believe the stock markets ‘churn’ until a result is determined, history suggests that periods of Democratic Gridlocked Congress tend to produce positive returns,” Darby wrote Thursday.

All this to say that everything is far from certain and that investors should always be prepared for surprises.

“[O]Our common sense must recognize that 2020 is what 2020 is – unmatched in terms of precedent, ”wrote Brian Belski of BMO Capital Markets, which sees the S&P 500 rebound to 3,850 in 12 months.

“Therefore, we believe that it is still too early not to count a potential blue wave and even less any other ‘surprise’ given the fragility of the emotions and the volume of the rhetoric which unfortunately seem to seize the investors more than the facts. “

But like his peers, Belski acknowledges that history suggests that the outlook for equities looks good in “all plausible election scenarios,” particularly in 2021 when there are no elections on the calendar.

“The S&P 500 has historically posted strong double-digit percentage gains under a Democratic president, regardless of the makeup of Congress,” observed Belski. Specifically, a Democratic President and a divided Congress produced an average S&P 500 gain of 14.8% in non-election years, while full Democratic control produced an average S&P 500 gain of 12.1% during non-election years.

Through Sam ro, editor-in-chief. Follow him on @SamRo

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Unanswered election questions and why forecasters expect stocks to rise: Morning Brief

Although uncertainty persists, there were no surprises that rocked the market

All plausible scenarios suggest stocks will continue to rise

What to watch today

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