Prediction Markets Now Factor In 65% Chance Of Biden Victory. Here’s What That Means For Stocks And The Economy

Topline

Talk of a blue wave has heightened on Wall Street in recent days, as polls and prediction markets increasingly show former Vice President Joe Biden as the likely winner in the November election, and give Democrats a strong chance of taking control of the Senate while retaining their House majority. A blue wave would make passing legislation–including a highly awaited second stimulus bill–much easier, which could bolster economic growth, but not all industries would necessarily benefit.

Key Facts

Prediction market PredictIt this week upped the odds of Biden winning the election to 65% from 59% last week, and of Democrats winning control of the Senate to 67%, up from 56% last week.

Trump’s odds of winning fell to their lowest point since Biden clinched the Democratic presidential nomination in June.

A blue wave could support stocks exposed to energy efficiency, smart mobility and renewables given Biden’s green agenda, noted UBS Chief Investment Officer Mark Haefele in a Tuesday note to clients, but more importantly, Biden’s widening lead, coupled with the increased odds of a Democrat-controlled Senate, makes it more likely that a substantial stimulus bill could eventually come to fruition. 

As a result, Democrats sweeping the election would likely have a greater impact on near-term economic policy than other election outcomes, noted Hilltop Securities’ Tom Kozlik on Tuesday, adding that favorable fiscal policy relief, infrastructure spending and fiscal stimulus would in turn support spending, drive economic growth and be supportive to the bond market.

It’s not all good news, however; a blue wave could mean a 9% haircut for S&P 500 earnings if Congress passes Biden’s corporate tax plan, which calls for increasing the corporate tax rate from 21% to 28%, Goldman Sachs said in a weekend note.

Even though the odds of Democrats sweeping the election are looking more likely, expect volatility to remain high through the election, notes Jason Draho, a head of asset allocation at UBS Financial Services, adding that, “2020 has shown that a lot can happen in four weeks.”

Key Background

Wall Street experts, including StoneX strategist Vincent Deluard, have been predicting a blue wave for months, as polls increasingly point to waning support for President Trump. In July, Deluard said the outcome could hurt industries like big pharma and private insurers but benefit homebuilders and clean-energy providers. Meanwhile, Moody’s Analytics said in late September that a Biden victory would result in the biggest rebound in economic growth and employment.

Crucial Quote 

“We have always expected a blue wave to deliver more fiscal spending, as the Democrats are prioritizing economic recovery,” noted UBS’ Haefele on Tuesday. “This would counterbalance proposals for increased taxation, and we anticipate a blue wave would be neutral for markets overall.”

Tangent

PredictIt places the odds of CNN and Fox News naming a presidential victor within six days of the November election at roughly 80%–fairly in line with the least disruptive contested election scenario, which should have a largely negligible effect on the market, according to LPL Financial Chief Investment Officer Burt White.

FURTHER Reading

Today’s 2020 Election Polls: Trump’s Favorite Pollster Has Him Down 12 As He Trails In Key Swing States (Forbes)

Stocks Recover After Trump’s Back And Forth On Stimulus, Claims He’d Sign Standalone Bill (Forbes)

Here Are 3 Ways A Contested Election Could Play Out–And What Each Means For The Market (Forbes)

Biden, Democratic Victories Would Be Best Outcome For The Economy, Moody’s Says (Forbes)

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