What If a Blue Wave Happens? The markets appear to be pricing in a Biden victory. But what happens if Democrats take the presidency plus the Senate – in addition to already having the House? What does this mean for the stock and bond markets? Of course, no one knows for sure. Here are some thoughts. On the stock market, equity investors appear to be okay with a Biden victory. The S&P 500 is back near a record high. Some market participants even think that a “blue wave” on November 3rd could be good for the stock market. This is certainly a change in thinking from earlier, when investors were contemplating some of the items on the Democratic platform – $700 billion in infrastructure spending, a similar amount for child-care, and a multi-trillion dollar climate plan — all paid by rolling back the Trump tax breaks. The thought was that corporate confidence, cap-ex spending and unemployment would take a hit. Then, Congress passed the CARES Act in March. This “saved” the economy, but then benefits ran out in late summer. Fast forward to now, it does not appear there is time for a pre-election spending bill. If there is a blue wave, this could mean a potentially large stimulus package that could unanimously pass – and be a boost to the economy and the stock market.
What about the bond market? The flipside of a massive stimulus plan could mean a rise in long-term Treasury yields – meaning a drop in bond prices. If rates rise, this would mean a reversal of the trend toward lower rates, which the Federal Reserve might try to prevent. Analysts at BCA Research said there is a real risk to rising rates: “We estimate that there is an 80% probability of a U.S. election result that will give a lift to U.S. Treasury yields via increased fiscal stimulus. This may be true, but we can’t lose sight of the fact that bond yields are at historic lows – and once Covid 19 is behind us – there is likely to be some natural rise in rates. However, as the Wall Street axiom notes – “Don’t fight the Fed”. What would the Fed do in a rising rate environment? Jerome Powell has said they plan to maintain a near-zero short-term interest-rate target until 2023. They have been buying $80 billion of Treasuries and Government Agency mortgage bonds every month, keeping a lid on rates. So, there is somewhat of a tug-of-war going on in the bond markets. If the market “wins” and rates move higher, this could have an impact on growth stocks. Remember what happened in the fourth quarter of 2018, when the specter of higher rates cast a pall on the FANG (Facebook, Amazon, Netflix, Google) stocks. The election is only a week away. We will learn what happens very soon. Please let us know if you have any questions or we can be of service.
