Counting Down to Gridlock

Editors’ Note: MarketMinder is intentionally non-partisan, favoring neither any party nor any politician. We solely assess political developments for their potential impact on stocks.

Seven hours after the last polls closed, there are a few things we know. But, as anticipated, there are many things we don’t: including who will win the presidency and which party will eke out a Senate majority. Even the House, which seems likely to stay under Democratic Party control, remains too close for Associated Press election watchers (the media's referee on this stuff) to call. Yet one thing is clear: However the next few days go, not a lot has changed. There was no landslide either way, and it looks like gridlock will ultimately win the day. However you hoped or feared this election would go, stocks don’t think in partisan terms and never inherently prefer one candidate over another. But they do like gridlock, which reduces the likelihood of big legislation creating winners and losers—and that seems like what we are going to get, in one flavor or another. The US is just one country and politics only one driver, but fundamentals on this front are shaping up nicely, in our view.

We will spare you a lengthy dissection of who won what, other than to say that for all the talk from both sides as the polls opened, nothing crazy happened. The one Senate seat that has flipped so far, in Colorado, went to a hugely popular former Democratic governor—no shock there. Senate Majority Leader Mitch McConnell and South Carolina’s Lindsey Graham, both supposedly vulnerable Republicans, held on easily. So did Republican Senator John Cornyn in Texas. As we write, Alaska, Maine, Michigan, North Carolina and both Georgia seats remain too close to call. Given the margins in some of those states, recounts look virtually assured. In Georgia, multiple candidates vied for the seat opened by Sen. Johnny Isakson’s retirement. This race is headed for a January runoff election between Isakson’s replacement, Sen. Kelly Loeffler and Pastor Raphael Warnock, as no candidate is poised to take over 50% of the vote. In the other Georgia Senate race, Republican incumbent David Perdue has a slim lead as we write, but a runoff could be required if no one wins more than 50% of the vote. Whichever party winds up with control of the Senate, their edge looks set to be tiny. In our view, even if the Senate, House and White House are controlled by one party, that would mean swing-vote senators would likely pull legislation towards the middle. Note: That is if one party controls the presidency and legislature. If not, we would get structural gridlock reducing the likelihood any sweeping legislation passes.

As for the Oval Office, President Donald Trump and former Vice President Joe Biden each has a path to victory still. Officially, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, Wisconsin and one of Maine’s districts remain too close to call. Expect this to play out over the next several days at least, even if Associated Press pundits call the contest today, as some think is possible. Pennsylvania’s ballot receipt deadline isn’t even until Friday, and North Carolina’s is nearly a week later, on November 12. Counting in Fulton County, GA, got delayed when a pipe burst yesterday. Then, too, the campaigns seem geared up for recounts and legal challenges, which could take days or even weeks to play out. So no, we don’t know who will win. But we do know they will either have a very tiny Senate majority or a very tiny Senate minority. Gridlock.

A lot of people are reading into early morning market movement, pointing to big jumps in Health Care and Tech as well as declines in construction and banks as signs of gridlock. (The risers are supposedly celebrating a lack of regulation/legislation while decliners are disappointed by an allegedly tougher road to “stimulus.”) But knee-jerk reactions after elections are common, and we suggest you tune out the noise. It doesn’t hint at election outcomes, and it doesn’t tell you anything lasting about stocks’ performance under the next administration. About all we would say, at this point, is that markets are dealing with the lingering uncertainty better than they did in 2000, when a bear market was already underway and the Florida saga was a genuine shocker—which was our baseline expectation. This time, the campaigns have been lawyered up for eons, and a delayed result has long been the talk of the town, sapping its surprise power. We aren’t making a short-term forecast, mind you, but the difference with 2000 is notable.

Exhibit 1: Stocks and Election Uncertainty in 2000

Source: FactSet, as of 11/3/2020. S&P 500 total return index, 3/24/2000 – 10/9/2002.

As we have written before, whoever ultimately wins, we will have either a newly elected Democrat or re-elected Republican, neither of which is inherently bearish. A Biden victory might mean bigger 2021 returns next year as gridlock proves investors’ fears of radical change false. A Trump victory might mean milder 2021 returns as the same gridlock dampens hopes for supposedly market-friendly change. But milder is still positive, and rumors of either candidate’s impact on various sectors are greatly exaggerated, in our view. Biden is no more bullish for solar energy than Trump was (not) for coal and defense. All of that talk amounts to opinions, which have circulated for months and are likely already incorporated into stock prices. Doing anything with your portfolio based on the election, at this juncture, would be a very backward-looking, errant decision, in our view.

So stay cool, and enjoy the circus if you like that sort of thing. Take a nice autumn walk if you don’t. Regardless, get ready for gridlock to be an unappreciated tailwind in 2021. That doesn’t dictate positive returns, of course, as economic drivers matter and COVID lockdowns are a wild card. But US political drivers, at least at this early juncture, look fine.