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The Market Is Betting on a Divided Government

Investors appear to be factoring in a Biden victory and GOP-controlled Senate.

Email inboxes are getting rammed with notes from investment analysts today.

As of Wednesday afternoon, the presidential race is still too close to call. President Trump has proved more competitive than polls predicted and can win reelection against Joseph R. Biden Jr., as votes continue to be counted.

The evening of Election Day, markets were already riling. Then the president fanned uncertainty when he falsely declared he won reelection shortly after 2 a.m. Wednesday morning. Without explanation, he also said at the White House “we’ll be going to the U.S. Supreme Court.”

Investors initially recoiled. “As we feared, markets are not taking kindly to the prospect of a contested election following Trump’s press conference. With Trump claiming victory prematurely and at the same time demanding that vote counting be stopped, he has triggered investors’ concerns of a protracted legal battle and markets have quickly reversed course and sold off this morning as a result,” Alastair George, chief investment strategist at Edison Group, a London-based investment research and consulting firm.

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“Trump’s actions at this stage also reveal his internal concerns about the outstanding votes, highlighting that the electoral race for President remains wide open despite Trump’s better than expected result.” 

However, when markets opened today, a bullish take had taken hold after more voting results had flowed in. Analysts at Wolfe Research think the market is already pricing in a scenario where Biden wins the presidency and Republicans maintain a majority in the Senate. 

Should that scenario become reality, Wolfe Research believes big technology companies — including Facebook, Apple, Amazon, Netflix and Google — deserve their “buy” designations (as government initiatives would likely be limited), as well as agriculture, and stocks that give investors exposure to China. In that same scenario, the research firm said “green/clean energy” and electric vehicle stocks should be sold. As of this writing, the tech-heavy Nasdaq is up 4%, the S&P 500 is up 3% and the Dow Jones Industrial Average is up 2.5%.

If Trump wins the election, Wolfe Research likes the oil and gas industry, defense contractors, and managed care. China should be avoided and “green/clean energy” and electric vehicle stocks will also get a “sell” rating.

Until the presidential election is determined, BlackRock, the world’s largest investment manager, thinks investors need to take a deep breath. 

“A conclusive result could take a few days or more, potentially spurring market volatility and leaving open the possibility of a contested result. We prefer to look through any volatility and stay with high-conviction positions amid any sell-offs in risk assets. Likely low trading volumes in this period could magnify market moves,” the BlackRock Investment Institute said in a note Wednesday morning. 

“A win by former Vice President Joe Biden could bring a heightened focus on sustainability through regulatory actions and would likely signify a return to more predictable foreign policy. A re-elected Trump would likely double down on the ‘America First’ approach to immigration and trade, and usher in more deregulation. A Democratic sweep could bring large scale fiscal spending and higher taxes for companies and the wealthy,” according to the institute.

The asset manager also noted that whether Trump or Biden is elected, a stimulus package to help the U.S. economy through the Covid-19 pandemic is likely to happen in some form. 

“We see the election outcome’s implications playing out in fixed income and leadership in equity markets. We expect long-term yields to be capped under a Biden divided government or Trump re-election – and could see U.S. Treasury yields falling further after a pre-election run-up on expectations of a Democratic sweep.” the BlackRock Investment Institute said.

On CNBC’s Squawk Box, Mike Lewis, managing director of U.S. equity cash trading at Barclays, said that given the absence of a blue wave,  “the outlook going forward for markets is this is going to be more about policy and the Fed than it’s going to be about politics, which is a good thing for markets.”

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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