WHTW (10/30/2020) All Eyes on Tuesday

The next presidential cycle and its ideological framework is set to unfold next week. While current market expectations and polls favor a Biden victory, the historical stock market record suggests Tuesday's winner may actually be determined Monday.

Tuesday’s much anticipated presidential election is undoubtedly foremost on investors’ minds. Historically speaking, are there meaningful differences in stock market returns based on which political party occupies the White House? Not according to a study conducted by Fidelity; returns have been surprisingly similar:

During a global pandemic, with both parties offering different solutions to deal with the virus and its economic impact, political influence seems likely to carry a higher weight to the outcome for the market and economy over the next four years. While bipartisan consensus for strong fiscal support was quick to emerge for the $2.2 trillion CARES Act, subsequent fiscal measures have largely fallen flat. The most recent negotiations ended in a stalemate with parties unable to reach a compromise as to the appropriate scope and scale of additional government aid.

A Democratic sweep, with Biden winning the White House, Democrats maintaining control of the House and establishing a majority in the Senate has emerged as the most likely outcome from Tuesday’s election, based on current betting markets.

If this scenario were to play out, Democrats could have a clear path to pursue an expansive fiscal spending agenda. According to a recent article in Politico, the agenda would start with a multi-trillion-dollar coronavirus relief package and $1 trillion in infrastructure spending. In their analysis of the election, investment firm Pimco added to those priorities: strengthening the ACA and a focus on climate regulation—albeit with higher taxes likely to follow.

Of course, a Democratic sweep is not assured. Trump could win re-election with the composition of Congress remaining the same—a status quo outcome of sorts. During his second term, more tax relief could follow, accompanied by a continued low regulatory environment. There has also been some Republican discussion around acting on the bipartisan support for infrastructure, though few details have emerged.

The most uncertain outcome, at least the one not currently priced by financial markets, would be that of a Biden presidency and Republican control of the Senate, with the House remaining under Democratic control. In this environment, gridlock would be the likely outcome, and Democrats would be limited with respect to their ability to implement desired measures of additional Covid relief.

The Committee for a Responsible Federal Budget created their own estimates for the additional government spending at stake between the two presidential candidates:

Regardless of the balance of power, a framework for dealing with the country’s fiscal condition will need to be established after Covid, that is, unless there is a continued move toward Modern Monetary Theory type thinking from influential policy makers. The 12-month deficit as a share of GDP tripled to roughly 16% through September in response to Covid, and total debt to GDP is on track to grow close to 125% by the end of the decade. This calculation is before any additional Covid response outlined above is considered.

Market volatility has increased over the past several weeks leading up to the election. Looking at the component parts of the market, a Biden victory and Democratic control of Congress appears to be factored into market positioning. However, historical studies of the market are more inconslusive. If the three month return of the S&P 500 prior to election day accurately forecasts the presidential election, as it has done in 20 out of 23 elections since 1928, then it all comes down to Monday, with a return over .04% signaling Trump, and anything less signaling a Biden win.