Investors and the Election

By Brian Hilyard
Money and Investing Writer

Who would’ve guessed elections are great for the market? The S&P 500 has had its best week since April. At the time of writing, Biden has been declared President-elect, and it looks likely that Republicans will hold the Senate. However, the major equity indexes rose sharply on Wednesday and Thursday despite the outcome still being a toss-up. Doesn’t uncertainty translate to volatility in the markets?

Before the outcome was decided, investors had a lot of capital tied up in positions to benefit from/hedge against potential volatility. After President Trump’s surprise win in 2016, investors wanted to take extra steps to protect themselves. Once election night passed, much of that capital was shifted elsewhere.

Much of the early after-hours trading on Election Day reflected expectations that Democrats would sweep. Treasury yields and consumer cyclical stocks rose sharply in anticipation of increased spending via stimulus spending. But once it was clear the election would be close, Treasury yields fell sharply as investors took less risk-on positions.

The next day we saw that Republicans looked likely to keep the Senate, which would put a Mitch McConnel sized roadblock on new legislation if Biden were to win. That told investors to carry on as usual. Big tech soared, and the healthcare sector rebounded after weeks of weakness in hopes that there would not be any substantial legislation on drug prices and health insurance. The same pattern seemed to occur on Thursday. On Friday, as Biden closed the gap on Trump in several key states, the major indexes were relatively flat throughout the day, but the S&P 500 energy sector fell over 2%.

As of Saturday, with Biden looking like the winner, we can get a clear picture of other policies. A change that is unlikely to happen with gridlock in D.C. is tax reform. Biden promised to partially roll-back the 2017 tax cuts and reform taxes on multinational earnings and cash held overseas. While some discussions are likely, a Republican Senate is unlikely to stray from its pro-business stance. Other than that, I think both parties are quite skeptical of big tech, but any changes would have to be done via the judicial process, which takes significantly longer than passing a law.

Contact Brian at brian.hilyard@student.shu.edu