What did we learn on Wednesday morning? That America is split down the middle. That the States are more divided than united. We were reminded that the US voting system is complicated and hard for pollsters to predict. What did we not find out? Who will be President in January. Nor whether they will preside over a united or a divided government.
Investors were wrong-footed by the polls once again. In the run-up to Tuesday’s vote, these pointed to a win for Joe Biden and the Democrats. He may well get over the line still, achieving the 270 electoral college votes he needs to win the Presidency, but it will have been a much closer-run race than anyone, least of all in the financial markets, expected. We may not know until later this week, perhaps longer.
As many feared in the run-up to the election, the result now looks likely to be contested. The early votes of nearly 100 million Americans will be crucial, and contentious, in deciding the outcome. The Republicans have already filed lawsuits to dispute the legitimacy of postal votes in Pennsylvania, a majority of which are thought to have been sent in by Democrats.
On Monday and Tuesday, shares rose strongly as investors placed bets on the Democrats winning both the White House and the Senate, the so-called Blue Sweep. They calculated this would clear the way for a big fiscal stimulus package that would boost growth and help economically-sensitive cyclical shares. Bonds and their proxies in the stock market, high-growth technology stocks, would lose their appeal in that scenario.
As Tuesday night unfolded, the opposite story gained traction. A close contest for the White House and a growing chance that the Republicans would hold onto the Senate swung sentiment back towards the safe havens of government bonds and tech. Nasdaq futures out-paced the wider S&P 500, as the threat of more onerous regulation on tech stocks receded, and the yield on 10-year Treasuries fell as their prices rose.
As Europe woke up to the news, stock markets gave back the gains from the start of the week. The FTSE 100 fell by 0.4% at the open on Wednesday.
After last week’s worst performance for US shares since March, the relief rally was short-lived. Volatility looks likely in the days and weeks ahead, as attention shifts to the counting of postal votes in a handful of key battleground states in America’s rust-belt. The identity of the next President will be decided in Pennsylvania, Wisconsin and Michigan. It could even go down to a run-off in Georgia that won’t be decided until early next year.
To avoid this nail-biting extension to the election, Joe Biden needed to win Florida, Ohio or, less likely, achieve the first Democrat win in Texas since Jimmy Carter’s day. He managed none of these. Just as Hillary Clinton overlooked key parts of the electorate four years ago (blue-collar men and suburban mums), Biden may not have worked hard enough to win the Hispanic vote in the Sunshine State.
From an investment perspective, the Senate race is as important as the vote for the President. For the biggest fiscal stimulus of up to $8trn over four years to be a realistic possibility, the Democrats needed to win control of the White House and both houses of Congress.
That now seems to be a stretch, with the Republicans holding onto target Senate seats in South Carolina and Iowa. Flips to the Democrats in Colorado and Arizona were partially offset by a swing the other way in Alabama. The three seats needed by the Democrats (four if Donald Trump holds onto the White House) might be just out of reach.
Fading chances of a Blue Sweep make investors’ hopes for a rotation from growth to value and from defensives to cyclicals seem further away than it did. The dollar will retain its role as a safe haven. Fixed-income investments will stay in favour. Pressure mounts on company profits continuing to beat expectations, as fortunately they have so far in the third quarter results season.
The swinging pendulum of sentiment in recent days confirms the folly of trying to second-guess the markets. If the well-resourced pollsters have once again been left in the dark, what hope the rest of us? All we can do is ensure our portfolios are diversified enough not to be blown off course by the unexpected.
The clouds of uncertainty on both sides of the Atlantic will blow away in due course. For the time being, however, we can only watch and wait.
Five year performance
|(%) As at 3 Nov||2015-2016||2016-2017||2017-2018||2018-2019||2019-2020|
Past performance is not a reliable indicator of future returns
Source: FE, as at 3.11.20, total returns in GBP terms
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