How Wall Street is sizing up the election

How the world is reacting to the U.S. presidential election

Wall Street famously loves certainty, which was decidedly absent on Wednesday as investors waited for key states to tally the votes that could prove decisive in Tuesday's presidential election

"It's interesting that the market is up even though the uncertainty about who will be president has not really been resolved, in particular in light of possible legal battles," said Alexander Wagner of the University of Zurich and the Swiss Finance Institute, as well as the co-author of a study on the stock market's reaction to Donald Trump's 2016 presidential win. "But markets react to news. And it's not news that there will be lawsuits, or at least attempts at lawsuits."

Even as millions of votes were still being counted Wednesday, the Dow Jones industrial average rose nearly 370 points, or 1.3%, the S&P 500-stock index added 2.2%, and the technology-heavy Nasdaq rose roughly 4%. 

Here's how Wall Street is reading the election results so far.

More economic stimulus, at last

The $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act this spring bolstered both the stock market and the broader economy. Stocks have regained all of their early pandemic-related losses since the stimulus bill passed in late March. 

The negotiations around a possible second round of stimulus appeared to be what has been driving up stocks until recent weeks. Indeed, many were saying the reason the stock market was rising in the fall along with Joe Biden's poll numbers was that they expected a win for the former vice president would raise the odds of more stimulus spending. 

How the world is reacting to the U.S. presidential election

The stock rise following the election indicates that Wall Street thinks more stimulus is still coming. That could be because investors believe Biden will likely emerge as the next president. But it could also mean that a narrow win for Mr. Trump could signal voter dissatisfaction and cause the president to reconsider the need for a stimulus.

Just don't expect a massive stimulus

Although investors see better odds of a stimulus package, they think it's likely to be modest — far smaller than the CARES Act. That has less to do with the undecided presidential election and more to do with the Senate, where Republicans appear likely to retain a slim majority. That would make it harder for Biden to get a large stimulus bill passed through the Senate, where Republicans have resisted massive new spending.

The clearest sign that investors do not expect a big stimulus bill came from the bond market. Interest rates dropped on Wednesday and bond prices (which move in the opposite direction of rates) rose. That could be because investors were looking for more safety. But investors had been pushing up rates pre-election in anticipation of stimulus that could boost growth, and with it inflation. The drop in interest rates suggests investors think a major dose of stimulus is less of a possibility.

Stocks also signaled dimmer hopes for major stimulus. While the overall market was up, the best performers on Wednesday were technology stocks, which tend to grow even when the economy is stuck in the mud. More cyclical stocks like industrial companies or financials, which typically get the biggest boost from a better economy, were some of the market's worst performers on Wednesday.

Who needs a second round of stimulus checks the most?

In addition, the fact that the presidential election is so close could signal that the economy is stronger than it looks. A number of states, like Georgia and Arizona, have regained much of their pre-pandemic economy. That may be why Mr. Trump had a better night on Tuesday than many pollsters expected.

Tax policy is unlikely to change much 

There has been a lot of focus on the proposed tax policies of the two candidates, particularly Biden's plan to reverse Mr. Trump's corporate tax cuts and raise individual rates for the wealthiest Americans.

Yet it was always a long shot that Biden would be able to push through a tax increase while the economy remains weak. If Biden becomes president and Republicans keep the Senate, or if Mr. Trump were to win re-election with a slim Republican majority in the Senate, any tax overhaul becomes less likely.

Comparing Trump's and Biden's tax plans

With the close election, a number of Wall Street strategists now expect something Americans have grown used to in Congress — gridlock.  

"Political gridlock could also have some positive effects, another factor in today's rise in risk assets," Mark Haefele, an investment strategist at UBS wrote in a note to clients Wednesday. "Republican control of the Senate makes it very unlikely that there will be significant tax increases on business or individuals in the coming years."

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