• UCD Student Managed Fund

Political Stalemate: a Welcome Relief for the Markets

Updated: Nov 14, 2020

By Eoin Beecham, Sector Manager at University College Dublin Student Managed Fund

The US is still reeling from the election. As I write this, a Biden win looks the likely outcome, but this is subject to the whims of Trump’s litigation assault on the US election system. Traditional discourse would tell you that the Republican party are the party of the economy. Trump has repeatedly championed the economic and stock market gains under his administration. But why in the days prior to the election, did the markets make impressive gains with this trend continuing in the days since, despite the most progressive presidential administration in history looking likely to secure the Oval Office? The answer lies further down the ballot, and the forthcoming political stalemate that is likely to come from it.

The pillar of the Trump’s administration has always been the economy. The S&P has experienced bullish gains throughout the 4 years. The question of whether this is due to the administration’s economic policy or serendipitous happenstance is a question for another day. What cannot be denied is that America viewed Trump as the pro-economy candidate. Biden, on the other hand, has taken more combative stance against wall street. There have been rumblings of Elizabeth Warren being tipped to be the Secretary of the Treasury, with many advisors to the Bernie campaign now being assimilated into the Biden camp. Despite this, markets have still been on the up. Why is this so? Surely talk of a wealth tax, and a rise in the corporate tax rate will lead to a flee from equities and an overall skittish market. The answer lies in the state elections. The Democrats took emphatic control of the House of Representatives in 2018, acting as an obstacle to Trump’s executive actions. But the Republicans still controlled the Senate during this time. Before this election, the prediction was a heavily Democrat House, whilst the Senate race being on a knife edge. But what has emerged, is a narrow majority for the Democrats in the House, with the Republicans maintaining their majority in the Senate. With the partisan politics of the US, it will be very difficult for any sitting president to enact their party’s policies with a divided Legislative branch. Political stalemate will be the likely result.

The market is the confidence meter of the economy. Certainty and predictability are two major hallmarks of a bullish market. Political stalemate means exactly this. Wall Street will be left alone, to operate on its own devices. A Republican led Senate by the deft politician that is Mitch McConnell, will act as the flood levy against the progressive policies changes for Wall Street. A boring political climate, where little is done is exactly what Wall Street wants. The tax cuts and free-market policies of the Trump administration will mostly remain, with little of the Warren and Sander’s camps policies being enacted. Despite this, they will also get the positives of a Democratic administration within this current climate. An extensive Covid-19 stimulus package, an easing of tensions with China, a possible relaxing of trade tariffs, are all bullish trends for the markets. A boring political climate is music to the ears of Wall Street after a tumultuous 4 years. It is the rare opportunity where they will get the best of both worlds. The Trumpian economic policies, without the incendiary nature of the administration.

Biden will face an uphill battle to enact the reforms the democrats want to see, but it will be difficult when a branch of government as powerful as the Senate opposes him. The lack of action or reform will be welcome sight for worldwide indices as well. As the old adage goes of course, when the US sneezes, the rest of the world catches a cold. The US is still the world leader and largest player in the market. Radical reform seems unlikely, at least until 2022 midterms. But for now, Wall Street will be untouched by the regulatory claws of Warren, and Biden will be reliant on the winds of politics for policy reform. An uneventful administration bodes very well for the market. Julius Caesar was only ever as strong as his Senate, and Biden will be too.

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