Markets Lose All Hope For Big Stimulus With Election Outcome Still Unclear

Topline

As the prospect of a Democratic sweep, or “blue wave,” in the 2020 election shrunk overnight, financial markets—which have long priced in a Biden victory—backtracked on much of their early optimism for a political environment that could produce another massive stimulus bill. 

Key Facts

Futures contracts on the Dow and S&P 500 dropped sharply overnight as the race appeared to narrow, with President Trump gaining ground in Texas and Florida amid increasing uncertainty that Democrats could gain control of the Senate.  

After reaching levels not seen since June, yields on the ten-year U.S. Treasury bill dropped ten basis points as the race tightened and more investors flocked to the safe-haven asset. 

Tech-heavy Nasdaq futures, on the other hand, stayed in the green all evening, reflecting the market’s new bet on diminished regulatory pressure on the sector that would accompany another Republican-led Senate (a Democratic-controlled Senate is widely expected to attempt to curb what it would see as tech monopolies). 

Key Background

Speaking to CNBC on Wednesday morning, Mohamed El-Erian, chief economic adviser at Allianz, said this market behavior is consistent with three expectations: the lack of a major economic breakthrough (whether through another major fiscal stimulus package or other means); the fact that Federal Reserve needs to provide more support to the economy (especially in the absence of more relief legislation); and pessimism that the United States can get the coronavirus under control in the near future. 

Crucial Quote

“The Senate is not going to allow this to happen,” El-Erian told CNBC, after being asked whether investors were expecting major tax changes should former vice president Joe Biden win the presidency. “At least for two years, we’re not going to have major economic initiatives, absent a crisis.” In other words: Even if Biden wins the presidency, a Republican-controlled Senate will make it extremely unlikely that major tax changes will come to pass. A Republican-led Senate could also mean that another fiscal stimulus bill on par with the $2.2 trillion CARES Act is unlikely to pass—even under a Democratic president.  

Tangent

Treasury yields are tied closely in investors’ minds to the prospect of additional stimulus legislation, both because that legislation would be paid for by new issuances of government debt and because yields on that government debt tend to rise as the economy improves. 

What We Don’t Know

The outcome of the election is still unclear. Votes are still being counted in critical battleground states like Pennsylvania and Michigan. 

Further Reading

U.S. Stock Futures Mostly Lower Amid Election Uncertainty (Forbes)

On Election Day, Here Are Ten Grim Numbers That Sum Up The U.S. Economy Right Now (Forbes)

State And Local Governments Are In Crisis. Will The Election Change Anything? (Forbes)

Pelosi Slams White House Over Stimulus Delay While Kudlow Says There’s ‘Virtually No Hope’ (Forbes)

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