A house divided cannot stand. That was true in Lincoln’s time. The adage will now be put to the test again.
As of Wednesday morning, November 4, it remains impossible to call the US presidential election. Election uncertainty may last for several more days or even weeks. It will take days to count all the ballots and much longer to complete recounts and to resolve any contested votes in the courts.
But even if the next president remains unknown at this time, several other outcomes are abundantly clear. Above all, the US remains a deeply divided country. Biden will handily win the popular vote with easily the largest margin in US history for a losing candidate, should he fail to secure an electoral college majority. Yet Republicans will hold their advantage in the Senate and have narrowed the Democratic majority in the House of Representatives.
America may not be neatly divided into red and blue states, but it is sharply divided between red and blue voters.
What, as this juncture, can we say about the implications for financial markets? Beyond the truism that markets dislike uncertainty, other ‘tales of the tape’ are emerging. Bonds rallied, tech stocks soared, and more cyclical sectors, countries and currencies plunged as it became apparent that a ‘blue wave’ was not in the offing.
Why?
The absence of a clear mandate and the certainty of divided government dims hopes for sufficient fiscal stimulus and effective pandemic control. Accordingly, as the results came in last night growth expectations took a knock. Investors returned to the pandemic winners of big tech, comforted that corporate income tax rates are unlikely to go up and, perhaps, by the belief that anti-trust won’t make much headway in the next few years.
In short, Americans, surrounded by a swelling pandemic that the body politic cannot control, will continue to download movies and shows from Netflix and buy online from Amazon. Even as the economy suffers, big tech wins.
The minute-by-minute gyrations of markets betray other useful tidbits. As margins have shifted in Biden’s favor in Wisconsin and Michigan early Wednesday, bond yields have edged up, the Mexican peso has rallied, and the broader equity market has recovered. A Biden administration, even one facing a hostile Republican Senate majority, is seen as better for growth.
That makes sense. Science will guide executive leadership on the pandemic. Biden is more likely to successfully build coalitions on Capitol Hill to secure what economic relief can be achieved. Trade tensions will abate.
How should investors position themselves?
There is no sense in trading markets, given the uncertainties present. The only outcomes of this election, a narrow Trump victory or a narrow and contested Biden victory are unlikely to inspire confidence soon. Defensive strategies in stocks and currencies remain better places than cyclicals, for now. But if Biden becomes president, look for a gradual rotation to sectors, styles, currencies and regions that benefit from a better economy and a more effective response to the pandemic.
For now, we are all in a state of suspended animation.