What a Joe Biden Presidency Will Mean for Markets

By Akane Otani

The U.S. presidency is set to change in January -- but the two powerful forces that have driven financial markets this year will likely remain the same: the Federal Reserve and the pandemic.

Many money managers have coalesced around the idea that what happens now isn't dependent quite so much on what Democrat Joe Biden will do once he takes control of the White House -- especially since it appears Congress might be divided.

The U.S. still will be in the midst of fighting off the spread of the novel coronavirus. The labor market will still face a long recovery from the pandemic. And both those things mean the Fed almost certainly will hold fast to its pledge to support the economy by keeping interest rates low and snapping up billions of dollars of bonds each month.

"We're currently advising clients to vote with their ballot, not their portfolio," said Don Calcagni, chief investment officer of Mercer Advisors, which manages about $20 billion in assets.

Here are some other lessons drawn from the past week:

Throw out the detailed sector-by-sector playbooks many investment-bank strategists wrote up before Election Day.

Many on the Street with a longer-term guess about how markets will perform are focused on the big picture of what it means to invest in a low-growth, low-rate environment -- not individual winners and losers.

One big reason why? The widely held assumption among strategists and pollsters heading into Election Day that Democrats would win control of both houses of Congress is up in the air. Two key Senate races in Georgia are both headed toward a runoff in January. Should Republicans emerge victorious there, control of Congress almost certainly will be divided between the two parties. And that means sweeping policy changes that might benefit or hurt specific industries' bottom lines look less likely to come to fruition -- something that investors took into account as soon as betting markets showed declining confidence in a quick and decisive Democratic sweep Tuesday night.

Various trades tied to Democratic proposals unwound Wednesday. Student-loan servicer Navient Corp. jumped 5.8% in the trading session after Election Day, more than doubling the S&P 500's 2.2% gain. The stock had taken a hit at different points in the past year when Democrats proposed canceling large amounts of outstanding student debt. Health-care stocks, another group that had been pressured by mounting expectations of a blue wave leading to tighter regulations, also rallied. And on the flip side, exchange-traded funds tracking renewable-energy providers underperformed: The iShares Global Clean Energy ETF fell 1.3%.

"The markets are telling us that the outcome of the presidential race may be less important than what's happened with Congress," said Michael Farr, president of money-management firm Farr, Miller & Washington, in emailed comments.

Invest under the assumption that there won't be a huge fiscal-stimulus package.

What happened with the bond market shouldn't be overlooked either. In the weeks leading up to the election, bond yields rose on expectations that a Democratic sweep would lead to Washington passing a multitrillion-dollar fiscal-stimulus package. On Wednesday, that trade took a U-turn, sending the yield on the 10-year U.S. Treasury note on its steepest one-day decline since April.

Why does that matter? Typically, bond yields rise when investors expect a boost in economic growth and inflation in the future -- the type of conditions that might result from a more generous pandemic relief package. Take a look at the sharp repricing in the bond market that occurred last week and it seems that if yields are signaling anything, it is that investors should be prepared to deal with more of the same under a Biden presidency: an economy that will face a long, uneven recovery from the pandemic.

"The numbers, the likely outcome of the Senate races, and the presidential election doesn't change the fact that we are still fighting Covid-19," said Kevin Giddis, chief fixed-income strategist at Raymond James.

That helps explain why technology shares, long the choice of investment for those seeking growth in a sluggish economic environment, trounced practically everything else in the market last week. The S&P 500 technology sector notched a 9.7% gain for the week, its best showing since April.

In a way, big bets on a handful of megacap technology stocks present "a very, very, very bearish view of the future -- that nothing [else] is going to grow," said Richard Bernstein, chief executive and chief investment officer of Richard Bernstein Advisors.

Financial markets (and prediction markets) are quick to change narratives.

Take a look at the week's overall action, a hefty stock rally, and it might seem that markets have comfortably settled into the notion of a Biden presidency and gridlocked Congress.

But that certainly wasn't what many assumed would happen from the start.

Futures markets and betting markets swung sharply throughout Tuesday night, oscillating between predicting a Biden victory with a Democratic sweep of Congress, a Trump victory, and finally a Biden victory with a Republican-controlled Senate. Brexit, the 2016 elections and this past week have all shown that many so-called experts won't get the outcome right on the first try. That is why many long-term investors have said they would leave the guessing to the pundits and try to prepare a portfolio that can ride out any outcome.

Heading into the election, Mr. Bernstein said he had been taking a slightly more conservative approach to money management than he had in years past, given how much uncertainty was up in the air over the election, the global economy's trajectory, the pandemic and fiscal stimulus in the U.S. Like some other money managers, he said he was less concerned from a portfolio-management perspective about who won the presidency than who would take control of the Senate.

"Are we going to be making the performance 'hall of fame'? Probably not. But again, is guessing the right way to be managing client assets? I don't think so," Mr. Bernstein said.

Write to Akane Otani at akane.otani@wsj.com

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November 08, 2020 15:12 ET (20:12 GMT)

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