Even before the election is settled, some themes are emerging about what it will mean for the American economy. And on Wall Street, there’s a growing bet that the country will get a smaller stimulus bill than some had hoped for, and that taxes are unlikely to increase.
That’s because gridlock is an increasingly likely outcome, no matter who wins the presidential election. Results so far suggest Republicans, who have been wary of another blockbuster aid package, could keep control of the Senate, according to the Associated Press. The Democratic hold of the House is narrowing.
In recent weeks, as the coronavirus pandemic spun out of control, investors grew increasingly fixated on whether another stimulus package would emerge. “That’s the algorithm,” said David Ellison, a portfolio manager at Hennessy Funds. “The market views the stimulus a bridge to a vaccine, to keep businesses solvent, to keep credit issues low, to keep unemployment from really showing up in consumption.”
Discussions over stimulus spending to supplement the $2 trillion Cares Act passed earlier this year have stalled in Congress. Republicans have pushed for a package of around $500 billion or so, and Democrats are arguing for a substantially larger amount of support.
Election results so far suggest that tax increases are off the table, and that any stimulus aid is likely to be smaller than seemed possible before the vote, said Liz Ann Sonders, chief investment strategist at Charles Schwab. She cautioned that tax increases under a Biden administration were never as cut and dried as some made them out to be. “Campaign bullet points aren’t legislation,” she said in a phone interview. “They don’t become law after inauguration.”
In the past 10 days or so, the stock market had become jittery over the prospect of a Biden presidency and a so-called Blue Wave, which could have resulted in a capital gains tax in addition to increases on taxation on multination company revenue and, eventually, taxes on cash held overseas, said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. She, too, thinks tax increases are unlikely any time soon, and a smaller fiscal spending boost could mean less “onerous” methods of paying for them down the road.
“The assumption embedded in the market over the course of the last several weeks was that we would have something of a Blue Wave,” she said. “Now we’re looking at some form of gridlock no matter who is president.”
A key question is whether the Republican Party opts to become the party of fiscal restrain—under the Trump presidency, tax cuts widened the deficit even before the pandemic, and the health and economic crisis has necessitated government spending unseen outside of wartime. “Is there a point at which the Republican party goes back to expressing concern about the deficit and debt?” Sonders said. “And if they do, what is their solution?”
In the meantime, there are signs that traders are taking cover in the stocks of large tech firms—the so-called “stay-at-home stocks” that are among the few companies able to generate growing earnings when a pandemic threatens spending and mobility. The Nasdaq 100 Index of big technology stocks has outperformed large industrial firms and smaller company equities today. Adams thinks that will be a short-term trend that reverses next year as the economy recovers.
“It will be very choppy in the interim,” Adams says. She expects a period of stagnation between now and around February, during which policy makers are likely to be slow to pass another spending package. But Adams still predicts a vaccine and that additional aid spending will come along eventually. “We may have to wait, and we may see economic conditions deteriorate,” she said.