- Market reaction to the election depends almost as much on Senate control as the presidency
- Final-Oct U.S. consumer sentiment expected to be unchanged
- U.S. PCE deflator expected to edge higher but remain below Fed’s +2.0% inflation target
Market reaction to the election depends almost as much on Senate control as the presidency — The media is focused mainly on who will be elected as the next President in this coming Tuesday’s election. However, control of the Senate is nearly as important.
In the 2016 election, President Trump’s victory was not the only surprise. The other surprise was the ability of Republicans to retain control of the Senate, which allowed Republicans to sweep Washington and pass the big tax cut in 2017. The markets did not expect that Republican sweep in 2016, which was why consensus forecasts for the post-election landscape were so wrong in 2016.
If former VP Biden wins next week’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. The status quo would largely be preserved 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, then the status quo will largely be preserved 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. Thus, if Mr. Trump wins, the current gridlock in Washington will continue for the next four years.
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.
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. By next week, however, the verdict should be in, and the markets can then more accurately predict the course of the next few years.
The stock market currently seems to be almost neutral 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 once 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.
The betting odds for the presidential election are currently at 68% for former VP Biden and 38% for President Trump, according to PredictIt.org. The betting odds are at 63% for Democrats taking control of the Senate versus 38% for Republicans. Democrats continue to have strong odds of 87% for retaining control of the House versus 15% for Republicans.
The election might already be more than half over since 81 million people having already cast their ballots through mail-in ballots or early voting at the polls, according to the University of Florida’s U.S. Elections Project. There are still four more days until the election, and yet the early voting already amounts to 59% of the 138 million votes that were cast in the 2016 election.
However, next week’s election might not be more than half over because turnout this year is expected to be much higher in this election than in 2016. In fact, the betting odds at PredictIt.com are 46% for turnout above 160 million, which would mean the election is something less than half over.
Final-Oct U.S. consumer sentiment expected to be unchanged — The consensus is for today’s final-Oct University of Michigan U.S. consumer sentiment index to be unchanged from the early-Oct report of 81.2, leaving the index up by +0.8 points from September. Consumer sentiment has improved in the past three months, but has recovered only about a third of the plunge seen in March-April from February’s pre-pandemic level of 101.0. Consumer sentiment is being restrained by the new surge in the pandemic to record highs and the continued high levels of unemployment.
U.S. PCE deflator expected to edge higher but remain below Fed’s +2.0% inflation target — The consensus is for today’s Sep PCE deflator to edge higher to +1.5% y/y from Aug’s +1.4% and for the core deflator to rise to +1.7% y/y from Aug’s +1.6%. The expected core deflator of +1.7% would exactly match the current 10-year breakeven inflation expectations rate of 1.70%.
