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Decision 2020: What the apparent Biden victory means for the markets and investors

Global Investment Committee
Bringing together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets
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Viewpoints from the Global Investment Committee

While some recounts and lawsuits are still pending, the “Decision Desks” of most major news organizations have called the U.S. presidential election for Joe Biden. But control of Congress could remain divided between the Democrats in the House and Republicans in the Senate. Given these results, markets and investors are to be looking ahead to a 2021 in which policy changes may be relatively modest. But we do see some different investment opportunities across asset classes.

Where do things stand right now?

After states counted an unprecedented number of early votes and mail-in ballots (and pending the possibility of some contested recounts), Joe Biden now appears to be the presumptive President Elect.

The closer-than-expected election has delivered what may be another modest surprise: Current indications are that the U.S. Congress could remain divided in 2021. Republicans appear to have beaten back the blue wave scenario. And while some elections are still too close to call or are headed for runoffs, the GOP has a good chance of maintaining control of the Senate, though by a narrower margin than their current 53-47 majority. Democrats will retain the House of Representatives, as expected, but Republicans have gained seats in the House.

Should this be the case, divided government in 2021 alters the policy outlook meaningfully from what a blue wave could have produced. Taxes on individual, corporate and investment income appear unlikely to rise, something equity markets are cheering in the post-election environment. On the other hand, the size and timing of a much-needed economic relief package to help businesses and individuals affected by the pandemic has been thrown into doubt. So, while there are clear positives for the economy and financial markets coming from this outcome, there are some near-term downsides, as well.

What are the near-term market implications?

The strong prospect of divided government seems to have produced a benign outcome for financial markets, which have never minded political gridlock. In fact, the VIX Index, a measure of equity market volatility, fell after the election despite ongoing uncertainty around the results. Should it come to pass that Democrats do manage to take the Senate, that could spark a jolt within financial markets. But we might not know for sure until January.

In any case, financial markets appear to be looking past election uncertainty and are focusing on measurable fundamental factors like valuations, structural dynamics, demographics and the like. As we have emphasized throughout this election season, it is these very factors – and not the makeup of the federal government – that tend to drive long-term investment returns.

Perhaps the most notable market reaction has been the drop in the 10-year U.S. Treasury yield, which closed on Election Day at 0.90% and since fell below 0.80%. A flight to safe assets like Treasuries during times of uncertainty is common and may be partly responsible for the rally. In addition, any fiscal stimulus package is likely to be more modest under divided government, deflating hopes that had been inflating bond yields in the run-up to the election.

This election produced relatively little equity market volatility in its run-up, and investors seem to regard the outcome – to the extent it is currently known – as benign. U.S. equity prices rallied after the election, with technology a notable outperformer. The U.S. dollar has fallen against developed and emerging markets currencies. That’s consistent with our view that higher spending and a more predictable trade policy under Biden would, on balance, push the dollar down.

Which policy issues should investors pay attention to?

We see a number of policy issues that bear watching:

What are some investment and portfolio construction implications?

With the important caveat that we have already made that fundamentals are more important than politics when it comes to financial markets, we do see some opportunities that arise from the new U.S. political backdrop:

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Dimitri Stathopoulos
United States
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