We are living in an extraordinary period. As a country, we have just voted in a very contentious presidential election while the country is still reeling from the effects of COVID-19 — the forced lockdown of the economy and the continuing recovery. This year we have witnessed the largest quarterly drop in GDP, followed by the largest quarterly gain. The end result is that economic activity is still below beginning-of-the-year totals. Going into the election, the S&P was slightly higher for the year — historically a good indicator that the party in the White House remains in the White House. However, the breadth of the market has been very narrow and most stocks are underwater year to date. And of course, during this period, market volatility has jumped.
Besides the economic lockdown, another effect of COVID-19 is the record number of Americans voting by mail-in ballots. This large surge in mail-in ballots has caused delays in many states and we may not know the results of a number of close elections for an extended period.
However, at this point, if the final results for the Presidency, the Senate, and the House remain as they look now, Joe Biden will become President, so the Democrats will gain control of the White House and retain control of the House of Representatives. Republicans, however, will retain control of the Senate. The “Blue Wave” for which the Democrats hoped will likely not come to be. As a result, legislation coming out of D.C. should be more moderate.
Under this scenario, President Biden and the Democrats will be less likely to pass a number of items in the presumptive president’s platform. Joe Biden had promised to invest $2T in clean energy infrastructure which would have given a boost to renewables and the solar industry. This investment is expected to be curtailed substantially. In addition, because of the poorer showing than expected in states like Texas and Pennsylvania where voters rely heavily on fossil fuels for jobs, he is less apt to push legislation that is less friendly to the oil industry.
While the Democrats had expressed a desire to increase capital requirements on larger banks, we now expect a small departure from the existing legislation. The push for a larger coronavirus aid package, which would have benefited banks in the near term, is probably off the table. However, agreement on stimulus closer to the current House proposal of $2T is more likely.
While defense stocks have done well under President Trump and consensus thinking is that the Democrats would spend less on defense, Biden has said he may increase spending in areas such as “unmanned capacity, cyber and IT.” If these increases are pushed forward, Republicans will probably go along with this spending.
Biden is more likely to reduce trade tensions with China. He has said the best way to confront China on IP and technology transfers is by forming a coalition with allies and not through unilateral tariffs. He wants to increase spending to US manufacturers by directing $400B of federal purchases to domestic firms. We would expect Republicans to go along with this proposal, although the amount of spending may be different.
Biden wants to expand the Affordable Care Act with increased federal healthcare spending by $2T or more over 10 years, but he’ll be hard pressed to get the Senate on board. However, the dismantling of ACA is no longer on the table. Republicans will most likely go along with much smaller spending increases that support ACA. Both parties have come out against high prescription drug prices, so getting Democrats and Republicans to agree on legislation cutting pharma pricing is possible.
In addition, both parties will continue the push for regulations on big tech companies with antitrust investigations and break-up threats, as well as a possible repeal of Section 230 of the Communications Decency Act. Nevertheless, big tech stocks are moving higher the day after the election as investors see the likelihood of any sweeping changes in corporate taxation diminish now that the “Blue Wave” has not been realized (if results hold).
For more in-depth information on the policy differences of the two parties on healthcare, technology, energy and financials, please follow the link: Policy Differences in HealthCare, Tech, Energy and Financials.
It will take some time before we know how new legislation will play out in D.C., and even before then, who wins the election. We have had contested elections before — think back to Bush vs. Gore in 2000 — and the country has survived. We are fortunate to have the institutions in place to ensure a fair outcome. (For more on contentious elections, read about the Hayes-Tilden election of 1876. President Rutherford B. Hayes was not declared the winner until two days before his inauguration on March 5, 1877.)
But, expect volatility to remain high. Markets do not like uncertainty. Historically the markets haven’t favored either political party in the long-term and we anticipate the same this time around. While we may have heightened risk during this period, one thing is certain: when setting your investment policy, it should be based on your long-term goals and risk tolerance and not on the short-term aberrations in the market. We are experiencing unprecedented times, why should our elections be any different? While this process may be messier than normal, it is a sign of a well-functioning democracy.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.