- As Tuesday approaches, investors have placed their hopes on a so-called blue wave election result that does not appear to be receding.
- An important element of the blue wave was the prospect of a rapid and significant economic recovery after the elections.
- This expectation of an imminent revival has been complicated by the prospect of a divided government making its passage more difficult.
- It also has big implications for the stock market, which has rallied in recent weeks on expectations of timely economic relief.
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In the weeks leading up to Tuesday’s presidential election, the prospect of a so-called blue wave has encouraged traders looking for another round of stimulus. The idea was that under a unified government, the way would be open for Democrats to provide considerable relief and further catalyze an economic recovery from the lows of the pandemic.
But as the election results poured in, hopes for a blue wave were almost dashed. While it’s still too early to say definitively that Republicans will retain control of the Senate, this is the direction we appear to be taking. The too close-knit nature of the presidential race also complicates matters.
This leaves economists and investors scratching their heads, wondering what the next step is. For some experts, the result means the economy – and, by extension, the stock market – is heading for a worst-case scenario.
In a note to clients first seen by The New York Times, Holger Schmieding, chief economist at Berenberg Bank, said the combination of a Joe Biden victory and a Republican Senate would result in the most small recovery plan possible.
This would have major implications for the stock market, much of whose strength in recent weeks has been driven by the prospect of a large and imminent rally. Some pundits have even gone so far as to say that stocks will rally regardless of the presidential winner, as either option will provide more economic relief – and many fund managers have positioned themselves accordingly.
Read more: Iconiq Capital, which counts some of the world’s most influential families among its clients, broke down the investment implications of the US election. Here are the highlights of his 23-page presentation.
But the possibility of a divided government – previously viewed by many as a low probability outcome – threw a wrench in there. Wall Street investors bracing for a blue wave will need to adjust their portfolios. And since buying stocks was such a big part of those deals, selling could be considered.
That said, the major US stock indexes were significantly higher on Wednesday, especially the high-tech Nasdaq composite, which climbed around 3%.
This price development is in line with a recent forecast from Tom Lee, Managing Partner and Head of Research at Fundstrat Global Advisors. Lee said at the end of October that stocks would climb even in the event of a contested election, as any further delay in stimulus measures would be supported by the intervention of the Federal Reserve.
Ultimately, big conclusions cannot be drawn after just a few hours of trading, and there are still several electoral scenarios that could unfold and influence the market. But with Wall Street’s beloved life-sustaining blue wave, there’s no denying that the road to more stimulus has become significantly more complicated.
Read more: Famous economist David Rosenberg told us that 4 crucial trends will not change, no matter how the election goes. Here’s how to invest in all of them.