Its not Biden or Trump but Markets that won the U.S 2020 election

It’s been 4 days since election day Nov 3 and still no winner has been confirmed. The latest data points towards a Joe Biden presidency with a divided Congress. The Democrats would maintain control of the House with a reduced majority and the Republicans would hold on to the Senate with a slender majority. This points towards a gridlock state affairs in Washington similar to what we witnessed in last 2 years.

Is this good for the country? I don’t think so with the country in a deep state of health crisis. The gridlock would not help the cause of an economic stimulus package for relief from COVID-19 anytime soon and this could put a lot of pressure on the vulnerable sections of the society. There are reports of 100,000 daily cases in the U.S this week which points towards a second wave. At this point of time a strong federal Government backed by the Congress is needed to give a healing touch to a divided nation.

But the markets seem to be loving this gridlock. The prediction of a landslide for the Democrats did not materialize and this sparked a rally in the markets with both S&P 500 and Nasdaq reaching best levels not seen since April 2020. The markets are believing that a lack of Democrat control in the Congress augurs well for the business as it throttles the possibility of a rise in taxes on Corporations, Individuals and and Investment incomes. A divided Congress also reduces the introduction of regulations for key sectors such a Banks,Technology and Energy.

Maintaining the US corporate taxes at the current level will help companies retain more of their profits, supporting expectations of a significant rebound in the growth of S&P 500 earnings during 2021. After an expected 14.8 per cent decline in S&P 500 earnings for this calendar year and a revenue decline of 2.2%, analysts are projecting earnings growth of 22.4 per cent and revenue growth of 7.9 per cent in 2021, according to FactSet.

Equity sentiment and valuations also benefit from another important aspect of Washington gridlock. A sharp drop in long dated US interest rates this week reinforces the current status quo of a financial system anchored by low interest rates. The latest policy statement from the Federal Reserve on Thursday signaled the central bank’s intent to keep interest rates close to zero until there is a material improvement in unemployment and higher inflation.This makes the investors confident that there won’t be a major shift in policy both at the monetary and fiscal level. The passage of a stimulus by the end of the year would only contribute towards increase in discretionary spending by consumers ahead of Christmas which again would benefit Corporations.

The only aspect which could disturb this applecart is the reimposition of restrictions till vaccines hit the stores. Until that’s not done, Markets are expected to do well in the coming months.