US election uncertainty sees both stocks and bonds rally

Despite the election so far producing the outcome that nobody wanted, markets appear positive.

While most votes have been counted and most states declared for either candidate, the election is still too close to call. However, what does seem certain is that a decisive victory for either candidate is doubtful now, with the outcome likely to be the result of a drawn-out process. Market hopes for a Democrat “blue wave” and resulting large stimulus bill, have since faded.

Markets in the US, however, look relatively stable, if not positive. Futures contracts for the US’ three main indices were all positive prior to the US market’s opening bell, with futures in the tech-heavy Nasdaq index enjoying the most gains. In the first minutes of the US market opening, the S&P 500 gained more than 1.5%, while the Nasdaq 100 gained over 3%.

This could quickly reverse, but at the time of writing, markets appear broadly positive. 

In theory, a drawn-out and legally disputed election should be bearish for stocks. Many commentators have pointed to the legally disputed 2000 presidential election, which saw markets decline. Between the day of the election, on November 7, and the Supreme Court’s decision on 12 December, the S&P 500 fell by 4.3%. 

On top of this, given the current political climate, some fear that a legally disputed election this time around could be much more messy. As Pantheon Macroeconomics says: “the intervening period could be very messy, and the prospect of civil unrest is much greater now than in 2000, when the Supreme Court decided the outcome of the election in Florida, giving victory to George W. Bush over Al Gore”.

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At the same time, there appears to be less chance of the Democrats taking the Senate. While it is still not clear who will win, the potential for the Democrats not gaining control of the Senate significantly reduces the chance of the US Congress passing a fiscal stimulus bill anytime soon. This has potential ramifications for the US economy in the near term. Markets had supposedly “priced in” the prospect of a victory for the Democrats in the Senate and resulting large stimulus bill , so in theory the market should decline as it adjusts its expectations.

So, why do US stocks look so resilient, at least for the time being? First, it is worth noting again that we still do not know the outcome and that markets may sharply turn.

But the rise in the S&P 500 and the Nasdaq makes some sense. Tech stocks have been leading the market upwards: Amazon (NASDAQ:AMZN) gained 4% in the first few minutes of trading, as did Microsoft (NASDAQ:MSFT), while Apple (NASDAQ:AAPL) gained around 3% and Facebook (NASDAQ:FB) almost 7%.

Its possible that investors are simply reverting to a sector that has so far held up in the face of the Covid-19 pandemic. This makes sense if the expectation is for no stimulus package, meaning a worse US economic performance in the short term. Tech stocks, it appears, have become somewhat of a safe haven.

The other side of this is the relatively poorer performance of US small caps at the time of writing. For example, before the opening bell small-cap Russell 2000 Index futures were negative. Small-cap performance is closely tied to that of the US economy. The fear being reflected here is fading hopes of an economy-boosting stimulus package being passed anytime soon.

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At the same time, US 10-year bonds have also been rising in price, sending yields to lows not seen since June. Bonds are often seen as a safe-haven asset, so the recent surge in bond prices suggests markets are feeling somewhat nervous about the still unknown outcome of the election.

The fading prospect of any stimulus could also explain the rise in bond prices. No fiscal stimulus leaves central bank monetary policy as “the only game in town”. That could, in theory, mean the US Federal Reserve further loosening policy to support the US economy, which is generally good for bonds.

Elsewhere, European markets have also been broadly positive. After the opening bell, the FTSE 100 and FTSE 250 (as of 2.30pm on 4 November) were both up just shy of 1%. On the continent, France’s Cac-40 and Germany’s Dax Performance index were both up more than 1% at the time of writing.

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