As I write this, mid-day Thursday, two days after the Presidential Election, the winner of the presidential vote is still not fully counted and is likely headed to the courts. It looks like Biden is the winner but it is very close in a number of states and Biden has yet to bust the ball into the end zone. Sounds like the high level of uncertainty that investors loathe. Yet the stock market is way up in the last two days: the S&P 500 Index is up about 4% since Tuesday’s close and the Nasdaq 100 Index is up nearly 7% since then. If, as we are told, investors hate uncertainty, how can it be that the major stock indexes are up between 4% and 7% with the question of who is going to lead our nation still undecided two days after the election?
The Republican Senate
The stock answer is that “Investors like divided government.” That’s true, and it looks like we will have divided government for at least the next two years. However, I will take it a step further. What investors like about this election is that the US Senate will remain in Republican control, and this will work no matter who ultimately has won the Presidential vote. If President Trump prevails, then it will be at least two and probably four more years of what we have had for the past four, which was, pre-pandemic (and that is a really big qualifier), great for the US economy and great for the stock market. The House of Representatives will remain Democrat-controlled, and so we will have divided government no matter what.
On the other hand, if Joe Biden is proven to have won the Presidency, his and his Democratic Party’s ambitions will be checked by the Republican Senate. Tax increases for individuals and businesses, increased regulations on businesses, aggressive policies to address the environment, all of which investors consider to be anti-business and anti-economic growth, will be much harder to get passed by both houses of Congress if the Republicans continue to control the Senate.
If you believe pre-election polls, the Republican win in the Senate was unexpected. Democrats did flip one net seat, plus, if Biden wins, the Democrats get the tie-breaking vote. However, Democrats were expected to win in places like Maine and North Carolina and they did not, nor did they win in other states where their candidate was behind in the polls. Therefore, the Republican win was a surprise, and one that investors like, if the past two days are any indication.
Last time I wrote that you should not let your political bias get in the way of making good investment decisions. That said, it is easier to make good investment decisions if the environment is in your favor, and that appears to be what you have here for the next 2-4 years. A likely Biden Presidency with its more damaging inclinations being held in check by a Republican-led Senate should result in a relatively inactive legislative session going forward, and investors like that.