Biden Gets the Call, Investors Get Falling Uncertainty

Editors’ Note: As always, our political commentary is intentionally non-partisan. We favor no party nor any politician and assess political developments solely for their market and economic impact.

What now? The Associated Press and most other major media outlets called the presidential race for Joe Biden on Saturday, after his margin in Pennsylvania surpassed the threshold for a mandatory recount. Those electoral votes put him over 270, with Nevada and Arizona the icing on the cake a few hours later. Meanwhile, the counting continues in Georgia and North Carolina, and the Trump campaign has mounted several legal challenges. But should the results stand, Biden will be the next president, and pundits are already speculating about his cabinet appointments and economic policies—and how these will affect stocks. In our view, it is far too early for this sort of analysis. Keep your focus at a higher level: Uncertainty is falling, and as this continues, stocks should enjoy it.

Despite the headlines’ decisive tenor, we have a long way to go before full political clarity arrives—more opportunities for uncertainty to fall and boost stocks. The recounts, court challenges, Electoral College process and Georgia Senate runoffs will extend the drama for several weeks. Don’t be surprised if volatility perks along the way. Get ready, too, for chatter about challenges to the Electoral College process, faithless electors and other trivialities. Train yourself now to stay cool as headlines become more charged. While headlines have largely dismissed the Trump campaign’s legal challenges as meritless, ultimately the courts will decide, and only time will end this uncertainty. But it will end. On December 14, the Electoral College will vote. On January 6, a joint session of Congress will count and certify those votes. A president and vice president will be inaugurated January 20. By then, the Georgia runoffs will be done, and the new Congress will be seated. Crucially, markets will have priced this clarity before it arrives. Falling uncertainty throughout the next several weeks is a bullish tailwind, in our view, even if there are a few speedbumps along the way. Even in rallies, stocks don’t move in a straight line.

As for the chatter about Biden administration personnel, in our view, it is fruitless speculation with no meaningful takeaways for investors. For instance, headlines have already zeroed in on Fed board member Lael Brainard as a potential Treasury Secretary. Pundits are guessing at policies based on her Fed speeches and service in Bill Clinton’s administration—over 20 years ago. But it is impossible to know whether she will even get the job, never mind what she will prioritize if hired. Long-ago actions aren’t predictive. Nor are speeches. The same goes for every other cabinet position. Similar speculation surrounded the Trump transition team four years ago, and most of it proved hollow. Ditto for the chatter over President Obama’s advisers and cabinet picks in 2008. Always watch what politicians do, not what they say, and don’t waste your time trying to read the tea leaves.

Equally unpredictable is what a Biden administration means for a stimulus package—the other major issue preoccupying headlines Monday. Without knowing the Senate makeup, no one can assess what will or won’t pass. Heck, the current Congress and Trump administration could finalize their own package before yearend, whether it is another round of bailouts and transfer payments or actual stimulus. Our views on this matter haven’t changed. If more cities lock down again, then more assistance will help those forced out of work. But the biggest stimulus, ultimately, will be when society adapts to the virus and normal life resumes. Maybe Monday’s vaccine news got us one step closer to that. Regardless, as Q3’s GDP has already shown, simply getting the vast majority of businesses open again is enough to kick the economy back into gear without additional spending and investment from Congress.

As always, think like markets, which look 3 – 30 months ahead. On the near end of that range, we have bullish falling uncertainty. Beyond that, toward the longer end, we have political gridlock and, however it happens, COVID losing its grip over the economy as it becomes old news and society adapts. Focus there, and don’t get sidetracked by twists and turns along the way.