- U.S. election day arrives with high uncertainty about who will win and also the process
- U.S. factory orders expected to extend recovery
U.S. election day arrives with high uncertainty about who will win and also the process — U.S. election day has arrived with high market uncertainty about who will win the election, as well as whether there will be a contested election with drawn-out legal challenges. There is also the possibility of civil unrest and violence.
The markets would be pleased if a victor emerges quickly, and the loser gracefully concedes. However, the outcome of the election is expected to take longer than usual because there are so many mail-in ballots to count. The final results of the election are also expected to be delayed by legal challenges.
There are a massive number of early votes to count and some states don’t even start counting their mail-in ballots until today. According to the University of Florida’s U.S. Elections Project, there were a total of 97.9 million early ballots cast, with 35.5 million in-person votes and 62.4 million mail-in ballots. That means that early voting was equal to 71% of the total 2016 vote. The breakdown shows that in-person voting equaled 26% of the total 2016 vote, and mail-in ballots equaled 45% of the total 2016 vote.
The presidential race is obviously the headline event. However, control of the Senate is at least as important.
If former VP Biden wins today’s election, but the Republicans retain control of the Senate, then Mr. Biden will not be able to execute his agenda through legislation since he would be opposed at nearly every turn by Senate Majority Leader McConnell. In that case, Mr. Biden would only be able to shift policy through executive-branch levers. There would be no tax hike, no big stimulus plan, no infrastructure bill, and no clean energy bill. Washington gridlock will continue except that Mr. Biden could shift the direction of the executive branch through regulation and executive orders.
Also, if Mr. Trump wins the presidency for his second term, Washington gridlock will also continue since Democrats are virtually certain to retain control of the House. In this case, even if Democrats win control of the Senate, Mr. Trump would be able to veto any piece of legislation he doesn’t like and Democrats won’t have a veto-proof majority in the Senate.
The most consequential outcome for the markets will obviously be if Democrats sweep control of the presidency, the House, and the Senate. In that case, Democrats will be free to pass whatever legislation they want, assuming they do away with the filibuster in the Senate. In the past, there weren’t enough votes in the Senate to do away with the filibuster, but Democratic Senators might now be sufficiently enraged by four years of Trump-McConnell to deep-six the filibuster. Even if they don’t eliminate the filibuster, a Democratic Senate majority could pass any bill they want that qualifies for the budget reconciliation process.
In fact, Speaker Pelosi said yesterday that if Democrats have control of both the House and Senate in January they will fast-track legislation to strengthen ObamaCare and implement pandemic relief. Ms. Pelosi said they would pass those bills through the budget reconciliation process, thus preventing a Republican filibuster.
The markets seem to be discounting a fairly high chance of a Democratic sweep since that is what the polls and the betting odds are indicating. The polls and the betting odds might be wrong, of course, but the markets at this point can only work with the information they have. Memories are fresh of the forecasting debacle seen in 2016 when Republicans swept Washington. Going into election day in 2016, the betting odds were 82% in favor of Hillary Clinton and 22% for Donald Trump. Also, the odds of the Republicans keeping control of the Senate in 2016 were below 50% at 46%, and yet the Republicans beat the odds to stay in control of the Senate. The betting odds were more accurate in the 2012 election, with the odds going into election day at 66% for Obama and 34% for Romney.
The betting odds for today’s presidential election, for whatever they are worth, are currently at 63% for former VP Biden and 43% for President Trump, according to PredictIt.org. The betting odds are at 59% for Democrats taking control of the Senate versus 44% for Republicans. Democrats continue to have strong odds of 86% for retaining control of the House versus 16% for Republicans.
The stock market currently seems to be neutral to slightly positive about the possibility of a Democratic sweep. Stock investors seem to be happier about the prospects for a big fiscal stimulus package in early 2021 than they are worried about higher taxes. That might be partly because the Democrats, if they sweep, would undoubtedly pass their stimulus bill in early 2021 and perhaps leave a tax hike for 2022 when the economy gets back on its feet. In that case, it might be a bit premature for the markets to get overly worried about tax hikes right now. However, the stock market may still stumble if the prospects become clearer for a corporate and capital gains tax hike. Mr. Biden has proposed raising the minimum corporate income tax to 28% from 21% and raising capital gains taxes for wealthier taxpayers.
U.S. factory orders expected to extend recovery — The consensus is for today’s Sep factory orders report to show increases of +1.0% m/m and +0.6% ex-transportation following Aug’s report of +0.7% m/m and +0.7% m/m ex-transportation. Factory orders have partially recovered the pandemic-caused plunge seen in March-April, but would have to rise by another +5.6% to match February’s pre-pandemic level of $496.463 billion. Yesterday’s ISM manufacturing new orders sub-index was positive at +7.7 to 67.9.
