Polls are closing across much of the East Coast, including some battlefields like Georgia and Florida, where the early results have President Donald Trump up close. The latest polls before the vote began on Tuesday showed Democrat Joe Biden to have a strong national lead over Republican Donald Trump, but with much narrower gaps in key states.
“To the extent that investors were hoping for quick clarity or a massive fiscal stimulus, those hopes are dwindling,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
Markets have been volatile in the last few weeks of the campaign as investors worried about the potential for a contested outcome, a surge in coronavirus cases and stretched valuations that are making megacap tech stocks look expensive as the economic rebound begins to slow. The S&P 500 has moved at least 1 percent in six of the last seven sessions. Biden’s strong lead has led some investors to speculate that there will be a relatively quick decision on who will prevail, removing a major level of uncertainty.
An increase in the number of mail-in ballots has made it more likely that some states will not be able to declare a winner on Tuesday, exposing markets to an endless process to determine the next president.
Adding to the anxiety, the markets weren’t always prescient about which outcome they preferred. In 2016, Trump’s perceived recklessness was seen as bad news for a stock market that hates uncertainty. Futures plunged to a maximum of 5 percent as it took the lead late on November 8, 2016. By morning, as investors followed through on promises to cut taxes and regulations, futures had rebounded more high. The S&P 500 has rallied 57% since its surprise victory.
Investors turned to Biden as his lead strengthened, capitalizing on his promise to negotiate a massive aid package to revive the economy hit by the pandemic. Assets considered to benefit the most from a Biden administration have climbed alongside his lead in the polls. The Invesco Solar ETF, ticker TAN, has jumped more than 140% in the past six months, bolstered by optimism that Biden would increase spending on infrastructure and green energy.
Hopes for a multibillion-dollar budget support package have propelled benchmark Treasury yields to their highest level since June, also pushing up battered financial company stocks. Meanwhile, the Nomura-Wolfe Biden voting basket – a group of stocks that bet on the potential winners of a Democratic victory while betting against stocks considered to be losers – hit a record high on Monday. The basket contains 30 pairs of trades in industries such as technology, healthcare, utilities and others.
But not all results under Biden are considered market-friendly. He also pledged to reverse the huge tax cuts Trump gave to American businesses in 2017, a move that, whatever public policy merits it may have, at least has the potential to create a stress for actions. Democrats have also promised tighter financial regulation and will look into how mega-cap tech companies operate.
Another possibility is that a Biden victory is not accompanied by Democrats taking control of the Senate, leaving Congress divided. It could temper expectations for a spending bill and threaten to block much of Biden’s platform.
The S&P 500 fell in September and October after a scorching summer rally. It closed Tuesday at about 6% below its all-time high.
While the deals reflect a democratic sweep, the betting markets are not convinced. A gauge has slipped to just over a 50% chance of the so-called blue wave – that Democrats will oust Trump and take majorities in Congress. Traders hedged the outlook for post-vote volatility, pushing a measure of expected movements in the Chinese yuan to its highest level in over nine years.
“The closer the race, the greater the risk,” said Erika Karp, Founder and CEO of Cornerstone Capital Group. “A close result is a risk for the market. The longer he drags on, the greater the risks. “