Belief that Joe Biden will win a shift in drives on...

Rising expectations of a Democratic Party’s victory in the White House and Capitol Hill race appear to be pushing investors towards stocks that could benefit from Biden government policies, including generous government stimulus spending.

While Wall Street notoriously did not anticipate Donald’s Trump victory in 2016, in recent weeks the investment pattern has shifted from US Treasuries and tech stocks to buying stakes in smaller companies.

Investors have also stepped into renewable energy stocks – which could be reinforced by Democrats’ engagement in greener energy initiatives.

Both steps, analysts say, are based on evidence from polling voter intentions and forecasting markets that suggest Joe Biden should win the presidency and his party take control of both Houses of Congress on November 3rd in what is called a “blue wave” -Victory wins.

“The rise in profit opportunities was accompanied by a rally in US stocks and a surge in US Treasury bond yields,” Capital Economics said in a research note to investors this week. “Investors are increasingly focused on how the election result will affect short-term financial policy.”

According to online bookmakers, the odds of a Biden win have improved since the start of the year, rising from 65.8% to 69.2% two weeks after the first presidential debate. Trump’s chances of winning have dropped from 34.8% to 32.3% over the same two-week period.

On Monday, Betfair said, “A big shift in US election betting on the stock exchange over the weekend means Joe Biden is now twice as likely as Donald Trump to win.”

As the odds of a Biden win have narrowed, investors seem less afraid of a Democrat-controlled government enforcing corporate tax hikes and higher spending, and more focused on the likelihood of a generous post-election stimulus package.

On Tuesday, prospects for a new round of stimulus spending before the elections clouded as talks between the Democratic and Republican leaders over the Trump administration’s $ 1.8 billion (£ 1.38 billion) proposal versus Jan. . $ 6 billion failed to reach an agreement.

House Democrat spokeswoman Nancy Pelosi, who is pushing for $ 2.2 billion, said the proposal “fell well short of calling for a pandemic and deep recession”.

The prospect that a Biden administration could increase stimulus spending to $ 3 billion in January makes investors “think more about a broader economic recovery rather than just the narrow technology-centered ones we saw recently” said Oliver Jones, Senior Markets Economist at Capital Economics.

This is, in fact, a reversal of pandemic trends, with growth stocks, primarily pharma and technology, outperforming traditional value stocks in banking, industrial and energy.

Instead, some of these smaller stocks have started to outperform their larger counterparts, with the benchmark S&P 500 index rising 9% since late September.

“As the chance of the ‘blue wave’ has skyrocketed, we’ve seen value stocks outperform growth stocks,” said Jones.

The sentiment shift contrasts with two recent investor worries: Trump could try to hold on to power in the event of defeat, and Democrats would be bad for stocks if they tried to introduce additional regulation, taxes, and healthcare spending.

“If everything else is the same, a blue wave would likely prompt us to upgrade [US economic growth] Forecasts, ”said Jan Hatzius, chief economist at Goldman Sachs, this month.

The shift in sentiment has also led investors to put money into renewable energy stocks, which could do well under Biden’s green energy proposals.

Bank of America’s global research group said last week that a surge in solar exchange traded funds (ETFs) reflected investor expectations for a “blue wave”.

The Invesco Solar ETF is up nearly 150% so far this year. That’s nearly double the rise in the index, which tracks technology stocks that lagged the market’s surge after the coronavirus lockdowns in March and April.

Last week, solar and wind energy company NextEra surpassed the market value of ExxonMobil and Chevron, the multinational oil companies that have been among the most valuable energy companies for decades.

“I’ve never seen the writing on the wall so clearly: the recovery will be green and digital,” Geraldine Sundstrom, fund manager at Pimco, told Reuters.

However, it is always important to remember that Wall Street has an inconsistent track record in predicting the election result and the economic path a new administration will seek.

After Trump’s 2016 election, markets expected the new administration to embark on a massive round of infrastructure spending. Instead there was a corporate tax cut and a trade war.

There are so many variables at stake – healthcare is being pressured by drug pricing, stocks of fossil fuel companies hit by new green initiatives, looming antitrust actions against Facebook and Google, and a banking sector that may be under more stringent regulations exposed to the Democrats – that the future, like the choice, remains uncertain.

“I’m sure this time it will be the same as it was in 2016,” said Jones. “The things we are focusing on now, like the size of a stimulus package, will be completely different in six months.”