Divided we stand Divided we stand http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\wall-street-sign-flag-2-small.jpg November 9 2020 November 4 2020

Divided we stand

Presidential result could take days but Senate holds Red and divided government assured.

Published November 4 2020
My Content

As the pollsters scrape the eggs off their collective faces and the lawyers arm up, the one clear verdict coming from the elections last night is no one party won. The Blue Wave died on the shores of Maine, where Sen. Collins staged an unheard of comeback, and appears to have handily won. Though the presidential outcome remains unknown, pending counting and possibly litigating the mail-in ballots in Pennsylvania and Michigan, however it is resolved, we are heading for divided government. In our view, this is a far happier outcome for markets than the prospect of a Blue Wave. We should still get a substantial fiscal package, but avoid growth-killing tax hikes planned by the Democrats in a sweep. This is supportive of our bullish market call for 2021, and our longer-term 5,000 target on the S&P 500 remains intact.

We anticipate the presidential race will take days, at least, to call, due to the late counting, even late arriving, mail-in ballots in Michigan and Pennsylvania, which now hold the key to either candidate receiving an Electoral College victory. Assuming most of the mail-ins are Biden votes, Biden would win. But it will hang on how many of these votes make it through the legal process. However, with the Senate apparently remaining in Republican hands, the presidential outcome becomes less key from a forward policy perspective, at least as far as the market is concerned.

The key risks for the market in the next few weeks come down to two, in our view. First, we could see a rise in civil unrest as the recount continues. Depending on how bad this gets, it could negatively impact economic forecasts for the economic revival. Second, the Covid resurgence we are seeing in Europe could start to pick up steam here as well. We see both these risks as real but short term. 

Looking forward to the spring, Covid should be waning with the combination of improving treatments, the arrival of multiple vaccines, warmer weather, and fewer and fewer people left to infect. The economic revival already underway should be gaining steam with another fiscal stimulus deal likely and visibility on the election/forward tax environment encouraging an investment resurgence. Cyclical companies in particular will be lapping very weak or negative numbers, helping the cyclical side of the market which has been a key drag till now. The Fed will keep short rates pinned near zero, and with deficits likely to rise in a divided government scenario, the yield curve should steepen somewhat; more good news for financials, a big piece of the value trade, where stocks are cheap.

So while we had no clear political winner last night, we did have a winner: Mr. Market. 

Tags Politics . Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

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