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  • Writer's pictureOak Watson

What a ‘Blue Wave’ Win Could Mean for US Equity Markets

This coming Tuesday, the US goes to vote for its 59th quadrennial presidential election. Joe Biden, the Democratic candidate, is challenging Donald Trump for the most powerful job in the world.

The result of the election will have widespread ramifications not just on US markets but on a global scale too. Equity markets are looking volatile as investors trade at breakneck speeds in anticipation of one of the most hotly contested elections in American history.

At the time of writing, Biden’s lead of approximately 8-10 percentage points (depending on which poll you look at) is looking stable. In contrast, Hilary Clinton’s lead was falling apart by this point. Political analysts are speculating a decisive win for the Democrats, not just in the White House but in both houses of Congress as well – the House of Representatives and the Senate.

This ‘blue wave’ win would mean that Democrat bills would be passed with greater ease, providing a clear path for one of the most progressive agendas we have seen from a US presidential campaign in modern times.

Up until recently, a prevailing market narrative dictated that a blue wave win would prove sombre for US equities because of more regulation, higher corporate tax, and a less friendly business environment. This sentiment seems to have flipped in recent weeks.

The increasing likelihood of a blue wave win is now reducing election uncertainty and may provide avenues of opportunity for sectors such as alternative energy and high growth stocks. Since the start of July, the S&P 500 (an index of the US’ 500 largest publicly traded companies) has risen approximately 150 points (5 per cent) as investors ride the wave.

A Biden presidency would most likely mean improved Sino-American relations after a decades-long nadir. Expect Biden to take a more multilateral approach that aims to build bridges with trade partners such as Mexico and China, both of whom have experienced extreme rancour from Trump.

Utilities and materials-exporting equities would therefore potentially see gains. Expected stimulus aimed at helping small and medium-sized enterprises (SMEs) would also benefit small-caps in advancing ground on large-caps.

On the other hand, healthcare will be squeezed by a stricter approach to drug pricing, and a more watchful eye on communication services will hurt big tech companies such as Facebook and Google. Biden’s progressive policies could also have redistributive market implications if reductions in allowances and increased capital gains taxes cause the ‘one percenters’ to cash out their profits.

The size of the second stimulus bill enacted by whoever wins will, undoubtedly, have a sweeping influence on the economy, businesses and families. A second relief bill worth $2.2tn has already been approved by the Democratic-controlled House of Representatives, but – in typical US politics fashion – enactment remains deadlocked. Consensus seems to support the notion that a Biden stimulus package would be deeper and wider in scope. This could turbocharge economic growth and rekindle inflation, feeding through to appreciation for US equities.

Despite the cause for equity market optimism that a Biden presidency is inspiring, tumultuous economic events often occur in the first half of a term. Recessions, downturns, structural tax reforms – to name a few – have often happened within the first two years of a sitting president’s inauguration; prosperous stock market growth can more often be associated with the latter half of the presidency.

Wall Street behaviour is also traditionally a dire predictor of votes, election outcomes and their impacts. Having defied political gravity four years ago, Trump may well turn our heads again.

Furthermore, as Europe braces for tougher Coronavirus social curbs, the US’ exposure to these markets may be tested. Just last week, European markets experienced the steepest sell-off since June, owing to concerns regarding the second wave of the global pandemic.

The Vix index, a measure of expected volatility in US markets over the next month, traded at around 39 on Friday (the 30th), significantly above its long-term average of 20. Meanwhile, the Nasdaq and Dow indexes slid significantly into the red. Broadly upbeat earnings reports from America’s tech giants also failed to impress investors, with an undiscriminating fall in equities across the board.

In spite of last week’s gloomy trading, markets are appearing to conclude a sweeping democratic victory, and consequently pricing the expected policy outcomes into asset values. However, investors are hesitant to make big bets, especially given the result of just four years ago.

Equity markets are still looking quite shaky given the ever-changing situation. Whoever wins the White House has the hellacious task of kickstarting an economy arguably suffering from its worst economic crisis in a century. Some contest that the damaging, gross ineptitude from the Trump administration is irrevocable, whilst others see a blue wave win as a glimmer of hope in a grim world.

Inevitably, promises will be made, and promises will be broken. Politics often moves fast, but markets move even faster.



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