By: Ella Koeze·Source: Refinitiv
The outcome that many on Wall Street had feared emerged on Wednesday, as Election Day failed to produce a clear victor in the U.S. presidential race, leaving investors to wait and watch.
It made for a turbulent night of trading, with stock futures swinging into early Wednesday as investors tried to recalibrate their bets on the likely outcome. Trading in futures contracts for the S&P 500 moved between gains and losses nearly 10 times in the 12 hours leading to 6 a.m. Eastern on Wednesday.
But by the time Wall Street was open for regular trading, the market seemed to have found its footing — at least for the moment — and the S&P 500 rose. Led by a rally in technology stocks, the gains came despite the rising odds for what many investors had said would be the ugliest outcome for markets: extended uncertainty, a contested election and high probability of divided government.
By Wednesday morning, conclusive results from several states that would be crucial to determining whether President Trump would remain in the White House were still elusive. It may have helped calm investors somewhat that those key states — Michigan, Wisconsin and Pennsylvania — had always been expected to be slow to report results of an overwhelming number of absentee ballots.
The S&P 500 rose more than 2 percent in early trading Wednesday. The Nasdaq composite, heavily weighted toward big tech companies, jumped more than 3 percent as heavyweights such as Apple, Alphabet and Microsoft surged.
Small stocks, expected to benefit from the wave of government support that would follow a victory by Mr. Biden, fell. The Russell 2000 index of small-cap stocks dropped about 1 percent.
Other markets were also volatile. By Wednesday morning, yields on U.S. government bonds — a barometer of expectations for economic growth — had come off their overnight lows, with the yield on the 10-year Treasury note at 0.78 percent. Benchmark American crude oil prices were up about half a percent, well off their high point of the day.
Analysts cautioned about extrapolating a clear signal from the early trading, as the outcome of vote counting will continue to whipsaw markets as the election results are tallied over hours and perhaps days.
“This is kind of exactly what the market did not want to see and we’re up anyway,” said Steven Sosnick, chief strategist at Interactive Brokers in Greenwich, Conn.
And in fact, the trading overnight had shown just how quickly sentiment could change. Markets had swooned at around 2 a.m. Eastern, after Mr. Trump falsely said that he had won the election and that he would ask the Supreme Court to intervene in the race.
Though less extreme, the volatility was evident in European markets, too. After starting the day with a loss, both the Stoxx Europe 600 and the FTSE 100 were more than 1 percent higher.
Investors had seen a clearer path on Tuesday, when they positioned portfolios for an overwhelming Democratic victory in Tuesday’s election. A strong victory for Mr. Biden and the Democratic Party would have set the stage for a large pandemic relief spending package in Washington early next year.
Wall Street has been clamoring for such an aid program for months, but negotiations between the White House and the Democratic House leadership fizzled in recent weeks.
But the close results overnight raised the possibility that Mr. Trump could be re-elected, and the Senate remain in Republican control. On one hand, Mr. Trump’s low taxes and limited regulation have been popular among investors. On the other, analysts have been clear that a divided government could hurt the chances for a big spending package. Investors might also be wary that delayed vote counts could lead to a long period of uncertainty.
“If Republicans retain the Senate, we think the prospects of getting any bipartisan fiscal deal through Congress would be dramatically lower,” economists at Capital Economics wrote in a note on Wednesday. “The silver lining for the stock market, however, is that Biden’s proposed tax increases are unlikely to see the light of day either.”
Still, by the start of trading in the United States on Wednesday, neither of those outcomes was certain.
“At this point, we’ve got a couple days’ good grace with the market — but we need a winner fairly soon or it’s going to upset the apple cart,” said Ryan Detrick, the chief market strategist at LPL Financial.
On Election Day, stocks surged as traders and investors anticipated a “blue wave” with Joseph R. Biden Jr. defeating President Trump and the Democrats gaining both houses of Congress. Stocks rose and U.S. Treasuries fell as traders ditched the traditionally safe asset.
Early Wednesday morning, markets flipped.
Stock futures fluctuated substantially as the reality set in that it could take days to get a clear result, while Mr. Trump tried to claim victory before all the votes were counted. But analysts were also watching Senate races, which no longer clearly indicated a Democratic majority. At 5:30 a.m. Eastern, Democrats and Republicans each had 47 seats.
Here’s what analysts had to say:
“The optimism about a blue wave was premature”
There is confusion about what exactly Mr. Tump meant when he said votes should stop being counted, said Jane Foley, a strategist at Rabobank. But “there is some certainty,” she said. “The optimism about a blue wave was premature.”
“For the market, there is both good and bad news associated with the idea that Biden won’t have the blue wave through Congress,” Ms. Foley said. “On the one hand, there is disappointment that there isn’t going to be an end to this bickering between the House and the Senate in the near term,” which diminishes hopes of a large stimulus package. But on the other hand, it will be harder for Democrats to increase taxes.
The markets await a stimulus plan
“We expect market volatility to remain elevated until the result becomes clear,” Karen Ward, a strategist at J.P. Morgan Asset Management, wrote in a note to clients. “When it comes, the outcome will be primarily interpreted through the lens of the prospects for further fiscal stimulus. Politics are important, but other factors, most notably progress toward a medical solution for Covid-19, will also be key.”
U.S. growth expectations are lowered
“Markets, which had begun to factor in a Democrat sweep and a significant stimulus bill, are now reining in their growth expectations,” Keith Wade, an economist at Schroders, a London-based asset manager, wrote in a note to clients. “Estimates had suggested this could have been worth an extra 1 percentage point of growth in the U.S. next year.”
Investors can wait for an outcome, but not for too long
“My feeling is the market is probably willing to tolerate this through the end of the week,” said Eric Lascelles, chief economist at RBC Global Asset Management. “If it’s a matter of some legal wrangling beyond that — with only a limited prospect of truly changing the outcome — I think the market can live with that.”
The Federal Reserve will have to do more
“There is no result yet, and the chances of the ‘blue sweep’ expected by markets, is much smaller now,” Kit Juckes, a strategist at Société Générale, wrote in a note to clients. “That definitely means short-term uncertainty, until we get a result. It probably means less fiscal easing than would otherwise have been the case, and continued dependence on the Fed to prop up the economy, for longer.”
A flight to safe assets like government bonds is expected
“It could take even longer to know who won key congressional races, which so far suggest the Democrats and Republicans may be heading for a tied Senate,” Mona Mahajan, a strategist at Allianz Global Investors, wrote in a note. “Generally speaking, markets have performed best under divided government — when one party has only partial control of the House, Senate and presidency, although in this environment enacting a swift stimulus response would be a key priority. Until the final outcome is known, we expect some flight-to-safety response, which will likely favor perceived safe havens, such as government bonds, the U.S. dollar and gold.”
California voters on Tuesday approved Proposition 22, a ballot measure that allows gig economy companies like Uber and Lyft to continue treating drivers as independent contractors.
The vote opens a path for the companies to remake labor laws throughout the country.
Uber, Lyft and the delivery service DoorDash intended the measure to exempt the companies from a state labor law that would have forced them to employ drivers and pay for health care, unemployment insurance and other benefits. As a concession to labor advocates, the initiative offers a wage floor and limited benefits to drivers.
The Associated Press projected early Wednesday that Prop. 22 had carried 58 percent of the vote. It faced the strongest opposition in San Francisco, where Uber and Lyft have headquarters, with more than a 19-point deficit. The fight pit labor groups and state lawmakers against ride-hailing and delivery start-ups that spent $200 million in support of the measure.
Stock prices in the ride-hailing companies soared in early trading on Wednesday, each gaining more than 11 percent.
With the gig work model cemented in California, Uber and other gig economy companies are expected to pursue federal legislation that would protect them from similar employment laws in other states.
“The last 14 months in California have been the most critical point on this issue,” said Bradley Tusk, a venture capitalist who advised Uber on political issues during its early years.
Still, their victory comes as federal lawmakers and officials are increasingly eager to take on Big Tech. Members of Congress in both parties support cracking down on social media companies and reining in the likes of Amazon and Google. Uber and its gig economy peers could be caught in that anti-tech sentiment.
Oil prices rose Wednesday as the results of the U.S. presidential election remained uncertain. Brent crude, the international benchmark, gained about 2.5 percent, while West Texas Intermediate, the American standard, was up about 2.7 percent.
“The election’s outcome is not really priced in this morning,” Bjornar Tonhaugen, head of oil markets at Rystad Energy, a consulting firm, wrote in a note on Wednesday. But, he added, traders will be keeping an eye “locked on TV screens.”
Oil prices, which had risen as much as 2 percent earlier in the evening, slumped after President Trump said that he had won the election, despite the fact that several battleground states have not yet reported results. The prices quickly recovered.
With no clear outcome in the United States, traders are reacting to other news, including industry data published Tuesday showing a sharp fall in stockpiles of crude oil in the United States. This drop may indicate that economic recovery from the pandemic in the country, the world’s largest oil consumer, may be stronger than expected. Concerns had been growing that new lockdowns in countries like Britain, France and Germany might curb oil consumption.
In addition, hopes are increasing that OPEC and Russia may agree to curb output further or at least defer increases that are planned from the beginning of next year.
Over the longer term, analysts say, a victory for Joseph R. Biden Jr. might have negative implications for oil prices. Mr. Biden, for instance, has said he would push for a transition away from oil to greener forms of energy, leading to reduced consumption of fossil fuels. He might also try to revive the nuclear deal with Iran that the Trump administration torpedoed, eventually bringing a flood of Iranian crude back on the market.
Mr. Trump on the other hand has been a strong advocate for the oil industry in the United States, pushing for deregulation and looser environmental standards. Earlier this year, he leaned on OPEC and Russia to trim production to bolster prices in the United States.
Voters in Florida on Tuesday approved a ballot measure that would raise the state’s minimum wage to $15 by 2026.
Florida becomes the eighth state in the country to enact a minimum wage of $15, according to the National Conference of State Legislatures, but the first of them that Donald Trump carried in the 2016 presidential election. The District of Columbia has also enacted a $15 minimum wage.
Florida’s measure, known as Amendment 2, earned a place on Tuesday’s ballot in December and needed at least 60 percent of the vote to pass. With 99 percent of the vote counted, the measure had slightly more than 61 percent.
Under the measure, the state minimum wage would rise from its current hourly rate of $8.56 to $10 in September, and then increase by $1 every September through 2026. After that, annual increases would be tied to inflation.
A study by the Florida Policy Institute, a think tank backing the increase, found that the higher wage would directly benefit 2.5 million workers in the state.
A number of studies have found that moderate increases in the minimum wage have not led to significant job losses. But economists caution that the effects on employment depend on the size of the increase relative to a city or state’s wage scale.
That could make a $15 minimum wage more costly in a state like Florida, where wages tend to be substantially lower than wages in other states that have enacted a $15 minimum wage.
Sandwiched between Tuesday’s election and the Friday’s October jobs report, the Federal Reserve is set to announce its November policy decision.
There’s a good chance that the central bank will lay low at Thursday’s meeting, both because of the murky economic outlook and because the Fed is politically independent and will want to avoid inserting itself into the election storyline.
“I don’t think they want to get into anything political — anywhere near anything political,” said Gregory Daco, chief U.S. economist at Oxford Economics. Though Chair Jerome H. Powell is sure to face election-related queries at his webcast news conference, he is likely to dodge them.
“I’m sure he’s preparing in front of a mirror right now to answer some of these questions,” Mr. Daco said.
Yet by cooling prospects for a big government spending relief package, the closeness of the election — the outcome of which is not yet clear — could renew the spotlight on the central bank as it works to shore up the economy and sustain the recovery. The Fed slashed interest rates to near-zero in March and has been buying about $120 billion in government-backed bonds per month to soothe markets and support demand.
Officials are expected to discuss their future bond buying plans at this meeting, but economists expect them to hold off on major decisions as the economy’s path ahead remains wildly unsettled.
Manufacturing data have shown recent improvement. Spending on goods has been strong, bolstered by savings stashed away earlier in the year even as expanded unemployment benefits have lapsed and small business loans have run dry. Yet the situation could darken as consumers exhaust their savings and coronavirus cases surge, and the pace of job gains is already slowing.
Economists in a Bloomberg survey estimate that employers probably brought back or added 600,000 workers in October, a relatively small number when compared to the millions of Americans still out of work.
Fed officials have historically received key jobs numbers from the White House Council of Economic Advisers ahead of their release on Friday morning. But the secure fax containing that data has typically been sent late on Thursday afternoon, a person familiar with the process said. Officials will not know the October numbers before their meeting.
Mr. Powell will hold a news conference around 2:30 p.m., after the Federal Open Market Committee releases its statement at 2 p.m.
No matter who is elected, the next president will face an economy that is still reeling after the shutdowns last spring. Some areas have bounced back, but others remain deeply depressed, and millions of Americans are still out of work.