By Robert Vaudry, Managing Director at Copia Capital Management
There is no prospect of a Democrat clean sweep, which the polls considered to be the highest probability yesterday and which the markets had begun to price (steepening the yield curve, weakening of tech stock prices and a weakening dollar). Trump has outperformed among Hispanics and African Americans in the South East, which has outweighed his losses of white men to the Democrats – that is an interesting development for the future.
It looks like the Democrats have (probably) held the House but will not take the Senate: so whoever wins the Presidency – and at this stage it is impossible to predict – will have to deal with a deadlocked Congress. And that means no significant policy initiatives can be undertaken without bipartisan support. The only area of real agreement is in policy towards China.
In the absence of a co-ordinated policy from Congress, the burden of dealing with the economic fallout from the pandemic will continue to fall on the Federal Reserve. This means lower interest rates for longer, less overall economic growth and continued strength in growth stocks. The risk remains to the downside. The futures market has responded as you might expect by flattening the yield curve, driving up the NASDAQ and the dollar has strengthened.
The result of the Presidential election may well be decided by the Courts – several cases have been filed to challenge the validity of ballots cast and hearings are scheduled for these today. That uncertainty is bound to play on sentiment. If Trump wins it will be in the Electoral College but he will almost certainly lose the popular vote. And it is worth noting that the GOP has not won the popular vote since 1988- over 30 years ago. That is bound to corrode support for the US’ democratic credentials. If a majority cannot get rid of its leaders, how does it work? But this is a long-term issue.
Lastly, any decisions taken by the Supreme Court say on Obamacare, the electoral system, gay marriage etc will not be overturned by Congress so the appointment of Barrett will matter hugely also in the long term.
But in the short run, once the result is clear – court determined or not- you will have an opportunity to come back into the market but the risks are high and I suspect that non-US markets in the circumstances will continue to underperform.
One thing is clear: the US looks very much like the EU institutionally, with multiple overlapping (state) and regional interests, where compromises have to be brokered by careful nurturing and losers have to be compensated to secure their agreement, given the de facto vetoes in the system. In both cases the result is that the central bank has to do all the heavy lifting.
Ironically, it is Asia that looks good at the moment and especially China.