Investors See Potential For Dream Scenario In Early Election Returns

As election returns poured in Tuesday night into Wednesday, U.S. stock futures jumped, powered by the growing likelihood that former Vice President Joe Biden would capture the presidency but Republicans would hold onto the U.S. Senate.

Many investors see such a split as the ideal scenario to boost corporate earnings. Democrats had been narrow favorites to take the Senate, but now, without a majority there, it is unlikely that they will be able to pass sweeping tax reforms that were a cornerstone of Biden’s campaign, but which had spooked some investors.

“A divided government that has checks and balances is going to be rewarded by the market,” JPMorgan Chase Global Head of Equities Cayman Wills said on the latest Walker Webcast, presented by Walker & Dunlop. “Not having a single party in power to push its agenda is the most market-friendly outcome.”

The Dow Jones Industrial Average climbed over 800 points by early afternoon Wednesday, as returns emerged showing that Biden had established narrow leads in Wisconsin, Michigan and Arizona, but Democratic challengers had fallen short in competitive Senate races in Maine, Iowa and South Carolina.

A Republican edge in the Senate would make it very difficult for a potential Biden administration to make good on its promise to raise corporate taxes, which were lowered in 2017 by the landmark Tax Cuts and Jobs Act. Maintaining the status quo on corporate taxes is likely to drive higher earnings and stock prices, Wills said.

Biden’s tax plan would also have raised capital gains taxes, a move that some experts predicted would incite a mass stock sell-off, especially in sectors like technology that have outperformed their peers through the coronavirus pandemic. Wills said erasing the possibility of higher taxes on gains may buoy investor confidence through the end of the year.

But equity markets, which are averse to volatility, may prefer President Joe Biden to President Donald Trump, especially when it comes to foreign policy and trade with China. 

“Both candidates are taking a ‘tough-on-China stance,’ but the approach is different,” Wills said. “The potential for new tariffs from Trump creates jitters in the market. Biden is likely to take a more measured approach.”

On the webcast, American Bankers Association Chief Communications Officer Peter Cook noted that many of the most influential federal appointees won’t be headed out in January even if Biden wins the presidency. Federal Reserve Chairman Jerome Powell’s appointment extends through at least February 2022, while Federal Reserve Vice Chairman for Supervision Randal Quarles will serve through at least October 2021.

If elected, Biden would be able to appoint his own Treasury Secretary, chairman of the Securities and Exchange Commission and a director for the Consumer Financial Protection Bureau, but a Republican edge in the Senate would keep many of the same faces leading the congressional committees that control financial oversight in Washington.

Idaho Sen. Mike Crapo, chairman of the Senate Banking Committee, would likely take over for Iowa Sen. Chuck Grassley as chairman of the Senate Finance Committee, Cook said. Crapo would likely be replaced by Pennsylvania Sen. Pat Toomey, a Republican fixture on numerous financial and budget oversight committees.

However, not everything about a split between a Democratic president and a Republican Senate is likely to please equity markets. Walker & Dunlop CEO Willy Walker pointed out that a Democratic sweep would likely have meant a robust stimulus package along the lines of the $3 trillion HEROES Act, which the House passed in May. If Biden wins the presidency, Senate Republicans are unlikely to pass any sort of stimulus before the inauguration in January. If Republicans hold the Senate, Wills said, the next stimulus package is unlikely to exceed $1 trillion.

The biggest question for the economy, Wills said, is still the coronavirus pandemic. The government is unlikely to change its economic or health policies between now and the inauguration.

“You either have a lame-duck president or a vindicated incumbent until January, so we’re not going to see a shutdown of the economy in the short term,” Wills said. “No matter who assumes the presidency, though, we should see a more aggressive stance in February and March, especially if COVID cases are climbing as they have been these last weeks.” 

Without a vaccine arriving in the first half of 2021, Wills said, she would have to re-evaluate her bullish view on the economic recovery. Still, Wills and Cook both projected optimism about the economy in general. Though consumer spending has shrunk on travel and leisure, it has picked up in other areas, like home improvement, Wills said. She advised that while long-term investors could "take some nibbles" with dry powder that they have, they are best off to sit tight and let a recovery take hold.

Meanwhile, the banking sector is still sitting on large cash reserves that it built up prior to the pandemic. Cook said banks are not feeling the pinch nearly as much as one might expect for such a shocking and quick recession. 

“We talk to our members, and they’re generally upbeat about what’s happened,” Cook said. “They are still facing challenges and uncertainty, but they came into this crisis from a place of strength. The industry feels as good as it could in a pandemic.”

On Nov. 11, Willy will host Bahram Akradi, founder of fitness chain Life Time to discuss gyms and the future of retail. Register here for the event.

This feature was produced in collaboration between the Bisnow Branded Content Studio and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.