Wall Street adjusts to election uncertainty, lack of blue wave

Markets rose Wednesday as Wall Street began recalibrating amid election uncertainty and after an expected blue wave failed to materialize.

Traders found reason for optimism with an electoral landscape that favors a Joe Biden presidency and a divided Congress.

At market close, the Dow Jones Industrial Average was up 368 points, or 1.3 percent; the S&P 500 climbed 74 points, or 2.2 percent; and the NASDAQ jumped 430 points, or 3.9 percent.

Though key Senate and White House races have yet to be called, the prospect of Democrats defeating President Trump but with Republicans retaining control of the Senate augurs well for markets in several ways, analysts said.

“I think pretty much all financial markets view Trump as a destabilizing force, both domestically and globally, so removing a destabilizing force is a positive,” said Dan Alpert, managing partner of investment firm Westwood Capital.

“All of Trump’s rhetoric about how high the markets are because he’s president, the market is going to crash if he loses, blows up in the face of what’s happening today,” Alpert added, citing Wall Street’s gains.

Biden is seen as unlikely to spark or escalate trade wars, as Trump has done at times through his tweets.

When it comes to controlling COVID-19, which many economists see as the key to climbing out of the coronavirus recession, Biden is expected to take a tougher, more consistent approach than Trump if he wins.

The persistent coronavirus outbreaks have held back the recovery. Employment estimates from payroll provider ADP on Wednesday indicated a significant weakening of the labor market, with just 365,000 private-sector jobs added in October.

“The sort of icing on the cake that I think is probably spurring the market even more right now is that the Senate will likely not flip to Democratic hands,” Alpert said. “You won’t be able to legislate anything too radical.”

In the immediate future, Senate Majority Leader Mitch McConnell (R-Ky.) raised hopes Wednesday that, after months of stalled negotiations, Congress would finally pass a new COVID-19 relief bill, a step Federal Reserve Chairman Jerome Powell has been urging for months.

“I think we need to do it and I think we need to do it before the end of the year,” McConnell said, adding that he and Speaker Nancy Pelosi (D-Calif.) agreed they should pass an omnibus spending bill to fund the government as well.

While the new dynamics may force Pelosi to give ground on the $2 trillion-plus price tag she championed before the election, traders have been less concerned with the magnitude of the package, so long as it passes.

Even a scaled-back relief package is expected to include stimulus checks and boosts to unemployment insurance benefits that expired in July, as well as extensions for other assistance that is set to run out and cash for state and local governments feeling the budget strain of the pandemic.

But looking beyond the lame-duck session, Wall Street thinks a divided government will generally lead to a continuation of Trump’s business-friendly policies and scale back some of the regulatory oversight they feared from a potential Democratic sweep. Fed officials have also ruled out hiking interest rates from near-zero levels, which tend to drive stock gains, until 2022 at the earliest.

“Going back to 1944, the S&P 500 has advanced 8.6 percent on average during years we had a split Congress versus 7.4 percent for unified Congress,” noted Lindsey Bell, chief investment strategist at Ally Invest.

Most crucially, Biden’s plan to raise the corporate tax rate from 21 percent to 28 percent is effectively dead in the water in a Republican-controlled Senate.

“The chances of a tax hike have been greatly reduced, if not eliminated, which is a positive for the markets,” said Brian Gardner, chief Washington policy strategist for Stifel Financial Corp.

The tepid election results, he added, reduce the odds that Wall Street crusaders such as Sen. Elizabeth Warren (D-Mass.) or Sen. Bernie Sanders (I-Vt.) might be elevated to top Cabinet positions in a Biden administration.

Still, several economy-boosting proposals from Biden may also fall by the wayside, or at least be trimmed back.

“I think it’s going to feel much like Obama’s second term, when he was battling the Republican Senate and not much got done legislatively,” said Mark Zandi, chief economist at Moody’s Analytics.

A GOP Senate would have a much bigger say in determining the size of Biden’s promised multitrillion-dollar investment in infrastructure, as well as boosts to green energy, education, health care, housing and child care.

“We would have gotten a much larger fiscal rescue package, then we would have gotten a piece of economic legislation that would have implemented some of Biden’s proposed Build Back Better plan,” Zandi said.

In a September analysis, Zandi estimated the economy would see 4.2 percent annual growth through 2024 under a Democratic sweep, but just 3.5 percent under a scenario in which Democrats win the House and White House but lose the Senate — the most likely outcome at this time.

“Given prospects that the economy will still be struggling next year in its recovery from the pandemic and less concern over budget deficits given the Fed’s commitment to maintain its zero interest rate policy for some time, there may be a way to strike a deal on more infrastructure and social spending in exchange for some tax cuts targeted to middle-income households,” Zandi wrote in his analysis.

Market gains in the days ahead are also likely to stem from the end of a tumultuous election cycle, according to LPL Financial Chief Market Strategist Ryan Detrick.

“Once the uncertainty is over, stocks tend to rally in November and December, with November the best month of the year during an election year,” he said.