Why the stock market is loving the prospect of a divided government

Al Drago/Getty ImagesA man walks past an entrance to the White House complex on November 4, 2020 in Washington, DC.
  • Stocks are rallying the most in months despite the US presidential race still being up in the air.
  • T hat’s because the most important election outcome has already emerged.
  • A Republican-controlled Senate, which seems likely to emerge, can also block tax hikes and regulations sought by Democrats.
  • Senate Majority Leader Mitch McConnell said Wednesday he aims to pass a smaller stimulus bill before the new year.
  • Visit the Business Insider homepage for more stories.

For stock investors, the most important US election outcome has already materialised.

Wall Street banks and pollsters alike largely expected a blue wave on Election Day. A Democratic-controlled government would pass massive fiscal stimulus early next year and reinvigorate the nation’s economic recovery.

But that didn’t happen, with Republicans winning several key Senate seats. Though some races are too early to call, it’s unlikely Democrats will pull off the sweep of Congress they hoped for.

Instead of lamenting the death of a front-loaded stimulus deal, investors quickly moved on and found new reasons to be bullish. Traders had been preparing for a Democrat-controlled government to raise corporate taxes and regulate major industries, policies that would likely cut into corporate earnings. If Republicans maintain control of the Senate, they’re poised to block such efforts.

It’s also “hard to imagine” that Senate Majority Leader Mitch McConnell will reverse the Trump administration’s tax cuts, Ralph Schlosstein, co-CEO of Evercore, said Wednesday. The lowered rates boosted corporate profits and helped fuel the longest-ever bull market.

Read more:
3 veteran investors share where to invest now to build resilient, long-term portfolios that win even if the elections produce a gridlocked government

That newfound optimism helped fuel the S&P 500’s largest one-day gain since June on Wednesday, when healthcare and tech giants surged as the specter of Democrat-led regulation faded. The rally extended into Thursday, with the same growth favourites pushing major indexes higher.

The legislative gridlock set to emerge in the 117th Congress doesn’t just help those fearing higher taxes and stricter regulation. McConnell opened the door to another relief package on Wednesday, saying that new aid should be passed before the end of the year. He also hinted he would support additional aid for state and local governments, a sticking point between parties that hampered talks ahead of the election.

“Hopefully the partisan passions that prevented us from doing another rescue package will subside with the election,” he said.

With new daily coronavirus cases reaching record highs and the pace of economic recovery slowing, negotiations would likely be more urgent. A near-term deal would at least somewhat appease those hoping for a blue wave to yield fresh stimulus.

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Whether investors hope for Biden to hold his lead or fall behind Trump in the lengthy vote-counting process, they can rest assured that “the most controversial policy initiatives of either party are off the table for at least two years,” Steven Ricchiuto, chief US economist at Mizuho, said Wednesday.

At least for the market’s medium-term outlook, the “picture hasn’t really changed,” Mark Haefele, chief investment officer at UBS, said Wednesday. “It’s rare that an election matters so much in and of itself for what markets are doing in the global suite of the economy.”

Now read more markets coverage from Markets Insider and Business Insider:

General Motors leaps 7% after 3rd-quarter earnings double analyst expectations

US weekly jobless claims hit 751,000, surpassing economist forecasts as labour-market recovery slows

An advisor at the world’s largest wealth manager breaks down why a Biden win and a split congress is the best long-term outcome for markets — and says investors should look to these 4 sub-sectors for ongoing gains

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