What has happened?
The US presidential election had not yielded a clear result by 7:00 am EST on Wednesday, November 4. With results in several key states including Michigan and Pennsylvania still in question, and ballots still being counted, neither President Donald Trump or Democratic candidate Joe Biden had secured the 270 electoral votes needed to win the presidency. Depending on final results, both candidates could potentially secure a victory. It could take days for final results to be declared.
In the congressional elections, the Democratic Party was poised to retain control of the House of Representatives. In the Senate, the Republicans appeared to be on track to maintain a thin majority. As a result, no matter who wins the presidency, the US Federal government is likely to remain divided.
Market reaction
Global markets were relatively calm in reaction to the uncertain US election results. US 10-Year Treasury yields slipped, after a strong run up in the previous five trading sessions. Global stocks were up modestly. Futures on the S&P 500 Index swung between gains and losses during the European morning. The US Dollar gave back initial gains against an index of other developed market currencies.
Economic policy outlook
Our economists have been preparing for various post-election scenarios and will convene later today to discuss the potential impact of the post-election uncertainty on US fiscal and monetary policy as well as on the economic growth outlook.
No matter who is declared the ultimate winner, we believe fiscal stimulus is likely to top the agenda of any new administration. Both President Trump and Joe Biden have pledged to push funds into the US economy, despite failed efforts to push through a new stimulus package before the elections. However, given the likelihood of a divided government, the size and shape of any near-term package remain highly uncertain. The US Federal Reserve’s easy money policy and the low interest rate environment is likely to continue under whoever emerges as the winner of this election.
However, tax policies would vary significantly, given Biden’s campaign promises to roll back Trump’s tax cuts and to increase taxes for companies and individuals. A Biden presidency is also expected to usher in policy change in many areas, including climate change, healthcare policy, technology regulation and international engagement. Under a Biden administration, we think tax hikes could prompt an increase in demand for US municipal bonds. And a restoration of more conventional diplomacy and more predictable trade negotiations with China could benefit emerging-market countries.
For now, however, markets will struggle to predict a policy direction in any of these areas.
That said, long-term US stock market returns haven’t been much different under Republican or Democratic presidents. Despite the current uncertainty, we don’t think investors should build investing strategies based on the election outcome, because no matter who wins, it’s very difficult to predict how policy will play out in practice. Instead, we think investors should focus on high-quality companies and issuers that are well positioned to surmount the challenges of COVID-19 and thrive through the pandemic in a low-growth world.
Evaluating politics across portfolios
Across asset classes, our portfolio managers generally do not take positions in stocks or bonds based on political considerations. However, when evaluating holdings and investment candidates, our research analysts assess how policy decisions could affect the fundamental outlook for companies and issuers. Given the current uncertainty about the outcome, our investment teams will evaluate the potential near-term impact on individual holdings.
