Election Market Update

Election watchers have experienced a range of emotions over the last few days, as votes have trickled in from key battleground states. As of this writing, we do not yet have a definitive outcome, except that, while still possible, neither party is guaranteed to control both Congress and the White House. In our recent pre-election webinar, we discussed the impact to investment markets from either a Democratic sweep or a successful defense of the Presidency and Senate by the Republicans. We highlighted the challenges and opportunities each scenario presented for investors. As to how a divided government might affect the markets, voters from each parties’ base may find something to be disappointed over, as the likelihood of more partisan policies, such as significant tax cuts or large spending packages, would be lower. For investors, however, a divided government should allay fears of a shift to the extreme right or left.  

The potential combination of Democratic President, Republican Senate, and Democratic House of Representatives would be unique in modern history. Indeed, the last time it occurred was Grover Cleveland’s first term from 1885-1889. However, more broadly, markets have shown particularly strong returns during periods of divided government. Markets have looked favorably on Democratic presidents working with a split congress. Typically, these periods have been associated with maintaining the status quo on taxes and spending priorities while advancing policies that have broad, bipartisan appeal.  

As we outlined in our webinar, there are three key policy issues that investors should focus on – tax policy, spending priorities, and trade. If current election result expectations stand, we believe more subtle changes to taxes and spending are in store. Trade, on the other hand, may transition to a multi-lateral (and less volatile) approach.  

• If elected as president, Biden would likely struggle to implement significant tax increases to fund his ambitious spending plans. Increases to capital gains, corporate, or individual tax rates are unlikely to make it through a Republican–controlled senate (assuming that is the ultimate outcome of the Senatorial election, which we might not know until January; a narrow Democratic majority might also make significant change difficult).  
• We anticipate that the parties might come together on another COVID stimulus package and potentially an infrastructure package, both of which have bipartisan support. However, Biden would likely be unable to push the more progressive elements of his plans through the Senate.  He might have a more immediate impact in areas like healthcare and energy by using executive action.  
• As the nation’s chief diplomat, Biden would likely shift our trade policies and international relations to a more multi-lateral approach. He is likely to emphasize “carrots” over “sticks” when negotiating with trade partners.  

We will be watching over the coming days and possibly weeks as votes are counted and certified. We believe that our client portfolios are well positioned for more uncertainty, and we are, as always, prepared to adjust as necessary.