Following last week’s election debate and the coronavirus diagnosis for President Trump, election polls show Biden extending his lead. Yesterday’s decision from Trump to pull the plug on negotiations is unlikely to help his case. A Biden win looks increasingly likely but what will it mean for the stock markets?
Trump halts stimulus negotiations
For a number of months, Democrats and Republicans have been trying to negotiate over a new stimulus package to aid the economic recovery. Until now, there has been a lack of any real progress because of various differences between the two sides. The only thing that both can seem to agree on is the need for more stimulus.
Whilst the Trump administration are more willing to spend, Republican senators are more reluctant, given how much has already been spent. Meanwhile, the Democrats initially wanted a package of around $3 trillion. For the Trump administration, the limit was around $1.5 trillion, and even this number would have been contested by some Republicans. In recent weeks, reports have suggested the Democrats have lowered the number they are looking for. However, there have also been disagreements on where the money should be spent, and it seems that insistence from House Speaker Pelosi on stimulus for local governments and mostly Democratic run states was the breaking point for President Trump.
President Trump has now said negotiations will only continue after the elections, where he predicted a win for himself. However, the polls show a clear lead for the Democrats and they have unsurprisingly taken up this development as an opportunity to continue pushing the rhetoric that Trump is not a suitable President.
Stimulus promised, but how much?
President Trump has promised a stimulus package after the elections, but this of course is dependent on him winning. The Democrats have also made it clear that they are prepared to inject more money into the economy. In either case, we may not get the stimulus until 2021 and the markets will not like this as the economic situation is delicate, which means that stimulus is needed sooner rather than later.
In recent weeks, we have seen large companies announcing job cuts and the lack of stimulus in the coming months will likely lead to further lay-offs across the country. Therefore, it is not just about the size of the stimulus package, but also the timing. Considering the fragility of the economy, the longer it takes to introduce further stimulus, the larger the package probably needs to be. A larger package is more likely to come from the Democrats rather than the Republicans, and this is where the focus may lie as we head into the November elections.
How will the markets react?
As mentioned above, a win for Biden and a blue wave is becoming increasingly likely, and Trump’s decision to cancel stimulus negotiations should help Biden’s cause. If the polls are broadly correct, then one of Biden’s first tasks as President would probably be to sign off on a stimulus package. If Senate and the House are both controlled by Democrats, I would expect to see a much larger package of anywhere between $3 trillion and $6 trillion.
Previously, I was expecting an initial downside reaction in equities if Biden were to win, in line with many other analysts. However, I am now looking for a more bullish reaction on the back of stimulus expectations. Some of Biden’s less favourable policies for businesses such as tax hikes are unlikely to come into play until the recovery is well underway and so the markets will not focus on this so much for now. The Democrats may also look to weaken the dominance of big tech companies, but once again, this is unlikely to happen anytime soon.
In the short term, the key question I will be asking is how much damage will the delay in bringing the stimulus have on the economy. The lack of stimulus in the coming months will almost certainly lead to further job cuts and possibly stall the labour market recovery. This scenario could cause more permanent damage to the economy. As such, heading into the elections, risk sentiment is likely to remain sour and we could see equities pushing lower.