The election analysis provided by Charles Schwab & Co., Inc. does not constitute and should not be interpreted as an endorsement of any candidate or political party.
Investors likely have many questions about the 2020 election. Votes were still being counted late Wednesday, but here are answers to some of the most frequently asked questions we’re hearing.
Q: What’s the biggest election takeaway for investors?
- The big news for investors is that it looks like Republicans will maintain their majority in the Senate.
- At this point, we appear to be looking at two more years of a divided Congress—and that means that whoever ultimately ends up in the White House is going to have a very tough time getting his agenda through Congress.
Q: What’s likely to get done over the next two years that would matter to investors?
It would be much easier to list all of the things that won’t happen in a divided Congress. But three things may happen:
- Economic stimulus: Another round of stimulus is likely, but the bill almost certainly will be much smaller than Democrats would have supported if they had won the Senate. What is unclear is whether it will happen during the November/December lame-duck session of Congress, or early in 2021, after the new Congress is seated.
- Infrastructure spending. Both parties have supported needed spending on roads, bridges, ports, airports, broadband capacity and other infrastructure projects, but the two sides have been unable to agree on how much spending and how to pay for it.
- Greater scrutiny of Big Tech. There is already a Senate hearing scheduled later this month with the CEOs of Facebook and Twitter, to review how the social media platforms performed during the election. Next year, it’s likely we’ll see more scrutiny from Congress and the regulators that probably warrants investors keeping an eye on.
Q: What is the likelihood of significant tax legislation being enacted that would take effect during and apply to the 2021 calendar tax year?
- Extremely unlikely. Major tax increases just cannot happen in a divided Congress.
Q: When will the legal challenges to the vote end?
- A key focus will be getting legal challenges resolved by December 8, which is the date by which states must certify their results in anticipation of a December 14 meeting of the electors in the Electoral College to cast their ballots.
- If legal challenges persist past when the Electoral College meets, and there is a state (or states) that has not certified its electors such that no candidate gets to the 270 electoral votes needed to win the presidency, that’s where constitutional issues around the House of Representatives selecting the next president come into play.
Q: What does the election map look like for the next mid-terms?
- Historically, mid-term elections are bad for the incumbent president’s party. In fact, only twice since the 1930s—in 1932 and in 2002—has the president’s party gained seats in both the House and the Senate in a mid-term election. Since 1934, the president’s party has lost an average of 30 seats in Congress during mid-term elections.
- In 2022, it’s likely we will once again be carefully watching the battle for control of the Senate. Of the 34 seats up for re-election in 2022, 22 are currently held by Republicans and 12 are currently held by Democrats.
Q: Both parties seem to dislike Big Tech companies, but for different reasons. Why?
- Democrats have tended to focus more on the anti-competitive behavior of these companies and recently released a scathing report after a 16-month anti-trust investigation into Amazon, Apple, Facebook and Google.
- Republicans have clashed with Big Tech leaders over perceived biases against conservative voices, content management and foreign influence. The Justice Department did recently sue Google for anti-competitive behavior in its search and advertising businesses.
- Further scrutiny of these companies is a near-certainty in 2021, but it’s difficult to see the two parties reaching consensus on how to deal with them. Strong action by Congress or the regulators to break these companies up seems less likely with a divided Congress.
Q: Why did stocks rally on Wednesday, as election results were being reported?
- A divided Congress means less risk of major policy changes, especially with regard to taxes. Health Care stocks also did well, likely because of a lower risk of major health care policy changes. Finally, there remains bipartisan support for getting a fiscal relief package passed sooner rather than later, which would support economic activity.
Q: Of the priorities that were laid out on the campaign trail, which are likely to have the most impact on investors?
- Markets appear to have been betting on the environmental priorities put forth by the Biden campaign. The MSCI Global Alternative Energy Index widely outperformed traditional energy stocks (as reflected by the MSCI World Energy Sector Index) as Biden's lead in the polls solidified over the summer, and saw an extra surge after the debate on September 29th.
- However, if the Senate remains in Republican control, it’s unlikely the U.S. will embrace major climate change legislation. Because alternative energy stocks have already rallied sharply, there may be risk to those gains if the Senate doesn’t flip.
Q: What do the election results mean for the bond market?
- The initial reaction sent Treasury yields sharply lower and flattened the yield curve, on the expectation that it will be more difficult to get a large fiscal stimulus package through Congress. Senate Republicans favor a much smaller fiscal aid package than House Democrats. A compromise will likely be less robust than what the market had been pricing in over the past few months.
- The Federal Reserve is likely to continue with its easy monetary policy. Short-term rates probably will remain near zero for the next few years, until the Fed sees inflation pick up and/or the unemployment rate fall closer to where it was pre-pandemic. That could mean the zero interest rate policy remains in place into 2024. We expect that 10-year Treasury yields will likely remain lower for longer. For the next six to twelve months, we expect yields to stay in a range of 0.5% to 1.0%.
- Municipal bond yields may rise relatively to treasuries, especially for issuers affected most directly by the COVID-19 crisis. There will likely be downgrades to bonds issued by state and local governments that already had high debt levels and have seen revenues decline due to the COVID-19 crisis.
- Similarly, we see credit quality as a driver of performance in the corporate bond market. Highly rated investment grade corporate bonds benefit from the Federal Reserve’s lending facilities and typically have the wherewithal to withstand a slow economy. Also, it’s less likely that corporate taxes will rise, which should help the cash flow and earnings of many issuers. However, high yield bonds are likely to see more downgrades and defaults due to slow economic growth and high debt levels.
Q: What’s the outlook for the U.S. dollar?
- The dollar has fallen by about 10% on a trade-weighted basis since March, when the Federal Reserve lowered rates and eased its monetary policy aggressively. In lowering rates aggressively, the Fed pushed real rates (adjusted for inflation) in the U.S. to levels that are similar to those in Europe and Japan. With the real yield gap closed, demand for dollars fell.
- We see more room for the dollar to fall, but at a slower pace over the next six months to a year. The U.S. budget and current account deficits are large, which means we have to import dollars. Without a yield advantage, that likely means the dollar will move lower.
Q: How does the election affect the outlook for the dollar as the world’s reserve currency?
- We don’t see any change to the dollar’s status as the world’s reserve currency any time soon. The dollar still accounts for about 80% of global transactions and the bulk of central bank reserves. Usage of the dollar has actually grown substantially over the past 20 years, and it dominates the world’s financial system.
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