– The worst that can happen is an unresolved situation –...

Biden is still the favorite to run away with the victory in the presidential election in the USA next week, but uncertainty about the result may cause unrest on the stock exchanges around election day. In the long run, it is less important for the stock market which party wins, as long as there is a crisis package.

Published:Published: October 26, 2020 6:35 PM

The Democrats’ presidential candidate Joe Biden is now clearly leading the polls and is the favorite of the betting companies. But with less than two weeks left until the election, a lot can still happen.

– In recent weeks, the market has begun to discount (count in) a blue wave, which means that the Democrats are taking everything, says Martin Guri, Nordic strategist at Kepler Cheuvreux, to E24. He then aims for Biden to win and for the Democrats to also get a majority in the Senate.

Guri has seen a lot of risk-taking in the market in the run-up to the election, and believes that many will end up taking profits when the result is clear.

In that case, there may be a stock market fall of up to a few percent one of the first days after the election, before the rise continues.

– In the next phase, the long money (such as pension funds or journ.anm.) Will come in and buy massively. It is a clear historical pattern that the stock markets have almost always gone up after the election.

Fears delayed crisis package

What Guri fears most is that there will be no clear majority in the Senate, or that it depends on postal votes or other factors that make it take a long time to decide.

– In the worst case, you have to wait for two months. In practice, this means that they may not be able to make a decision on the support package. A lot of support for the unemployed and others who are struggling in the corona pandemic is linked to the package, so it has a lot to say for shopping for Halloween and Christmas. The package is coming, but the big question is when.

Guri still believes that there will be a strong December in the stock market after the election is clarified, and recommends its customers to look at the long horizon after the election.

– It is clear that you should invest in shares. What else should one own to find a return? Next year will probably also be a fantastically good stock market year, he says.

Despite the pandemic, US stock markets have risen to new records during the crisis. The Oslo Stock Exchange, which is also burdened by a fall in oil prices, has, on the other hand, weakened and is still not back at pre-crisis levels.

– Follow the odds

The head of DNB Markets, Alexander Opstad, does not expect significant fluctuations on election day, but closely monitors the betting companies’ odds to see how the presidential candidates fare.

In the middle of last week, the odds were clearly in Biden’s favor, but this is something that can change from day to day, something Opstad is fully aware of.

– Now the betting companies show over 60 percent chance that Biden wins, and also that the Democrats take the Senate. With such a result, the Democrats will have a good grip on American politics.

– This is something that the market will take positively, because one will then assume that there will be more stimuli and that the policy will be more effective, since they then have the decision-making authority, Opstad adds.

– The worst thing is uncertainty

Opstad points out that if the result deviates from expectations, then there is a certain chance of negative market effects.

– If Trump were to win the election, which will be the surprising result now, I do not think there will necessarily be very big market unrest, but it creates more uncertainty than an expected result will do.

The most important thing is that there is a clarification, Opstad emphasizes, so that the market has something solid to relate to. Getting an answer is in itself positive.

– The worst thing is if something happens that creates a lot of uncertainty, for example a type of unresolved situation where the parties do not accept the result. It could create market turmoil.

He also reminds that when Trump surprisingly won in 2016, the stock markets still rose after a short, initial fall.

Light in the tunnel

Overall, DNB Markets has a recommendation to its customers about a moderate underweight in equities, ie that one should invest a little less than normal in the equities rising. However, it is mostly related to the prevailing uncertainty and high valuation levels.

– The most important thing is what happens to the corona situation and the authorities’ stimuli. The market needs to see a package coming, even if it takes a while.

Opstad believes that when you find out more about the vaccine, perhaps towards the end of the year or at the beginning of next year, the market will turn into a kind of reopening trade.

– It will take time before the world returns to normal, but when the market then sees light in the tunnel, it will be positive. Then there may be some sector rotation, ie the sectors that have done the weakest in the pandemic turn stronger, and vice versa.

Sector variations

Although it will not necessarily be the largest movements in total, it will probably be able to affect the various equity sectors more.

With a Trump victory, it is expected that classic shares with energy, oil and mining will do better, while Biden will be favorable for green companies and infrastructure, where he has announced major investments and restructuring in the years to come.

The investment company Pimco expects the biggest changes in policy with a clear victory for the Democrats, and believes that this will be reflected in increased fluctuations among the various sectors in November (see photo above).

Pimco also points out that the stock market has historically fared marginally better with the Democratic president, but best when power has been divided between Republicans and Democrats in Congress.