For the last couple of months, the general consensus was that election results would likely not be known on the night of November 3rd. As we woke up on November 4th, it turns out we didn’t know a lot more than we knew 24 hours ago. The initial indication coming out of election night is that the probability of a ‘blue wave’ has diminished. Going into the trading day on November 4th, markets have quickly reacted to this and are reversing many of the shifts that occurred last week as investors had placed greater odds on a ‘blue wave’ outcome.
The biggest driver of the initial post-election shift is a notable decline in long-term interest rates, which are quickly giving back the sudden rise in rates that occurred last week. Lower rates are spurring a shift in equity market sentiment as stocks that benefit from a steeper yield curve (i.e. financials) are likely to sell off. Moreover, lower interest rates tend to benefit companies with higher long-term growth prospects, notably technology companies. Today’s movement in the market is a reset of expectations away from a blue wave and toward what has become a greater probability of a continuation of a divided government. This shift on the surface is reasonable, however we won’t truly know whether a divided government is the outcome for anywhere from a couple of days to as much as two months when the second Georgia senate election is held.
Elections tend to be interesting milestones for the market. The outcome doesn’t result in an immediate change in policies. However, markets react by resetting assumptions, whether it be taxes, interest rates or drivers of economic growth. A divided government is likely to result in static tax policies and potentially smaller sized stimulus and infrastructure spending.
As we look past the election, the market will be focused on two significant milestones ahead. Next up will be additional fiscal stimulus. There is general agreement among politicians that another round is necessary, but the size and scope is of significant debate. As the number of coronavirus cases is accelerating, we believe lawmakers will appreciate the sense of urgency in the need to act, whether it be in several small bills or one larger package. We would view additional stimulus to be a positive for the markets, although its composition could lead to a shift in what assets are favored.
Following the passage of added stimulus, the next focal point is likely to be the timeline and efficacy of a COVID-19 vaccine. Multiple surveys we’ve looked at indicate that roughly half of the population would get vaccinated. The greatest hesitation is confidence in the safety profile of the vaccine, which it will be up to the government to validate. A successful vaccine that can be delivered to the broad population during the first half of 2021 would likely be cheered by the market and could favor those assets that are more economically sensitive. Should the prospect of a vaccine become delayed, or concerns around its safety profile come into question, this would likely lead to downside risk in the market.
In the present environment, we advise investors to resist the temptation of becoming overly focused on short-term swings that arise from specific events, such as the election. We have embraced a cautious optimism in our long-term outlook with any swings in volatility creating opportunities to benefit from security selection. However, the ultimate outcome of these near-term events cannot be predicted with precision and hence one should focus on what happens over the next several years not the next several months.