Election night turned into election week. While most had their eyes glued to the vote count in various states, the stock market was also reacting to swings in the vote.
Since September, the S&P 500 (NYSE: SPY) has been range-bound between 3200 and 3500. The Friday, before the election, the S&P 500 retested these levels and started to move higher. Given the polling, there were expectations that Biden would comfortably win with Democrats gaining seats in the House and Senate.
However, election night ended with former vice president Joe Biden pulling out a win in a race that was much closer than expected. In fact, at one point in the night, it seemed that President Donald Trump was going to win given his commanding leads in Michigan, Wisconsin, and Pennsylvania and outperformance with Hispanic voters in states like Florida and Texas. Congressional Republicans also did much better than expected by gaining 10 seats in the House. Control of the Senate will be determined by two runoffs in Georgia, although Republicans are favored to win both seats.
Positive for the Stock Market
The outcome was positive for the stock market. Biden as President removes uncertainty and increases chances of passage of a second stimulus bill. Additionally, it should lead to repaired relationships with allies and reduce trade tensions with countries like China.
Democrats losing in Congress takes away the power from the liberal wing of the party and emboldens centrists. It's a market and business-friendly outcome. Biden's Cabinet will be more centrist as he will need Republican votes. Additionally, gridlock in DC means that items on liberals' wishlist like the Green New Deal, Medicare for All, higher capital gains taxes, and increased antitrust regulations are less likely. It also reduces the chances of Trump's tax cuts being overturned.
The election being over also means that the stock market's focus will shift back to the economy and corporate earnings. Here, the story is quite positive. Although, one caveat is that coronavirus case counts keep rising. So far, this hasn't impacted the economy.
So far, Q3 earnings have been very strong. In aggregate, total earnings are only off by about 6% from last year which is remarkably better than analysts' expectations of 22%. Another positive for stock prices is that interest rates are at rock-bottom levels and are expected to stay low for quite some time. With gridlock in DC, it means that the Federal Reserve will do more of the heavy lifting. While this isn't ideal for the economy, it is quite constructive for stock prices.