Markets celebrate as nothing changes

Wall Street surge clarifies who really won

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U.S. markets responded to Tuesday’s ambiguous election results with an unambiguous rally -- the Dow gained 1.3%, the S&P 500 2.2% and the tech-heavy Nasdaq 3.9% on Wednesday. As of this writing, stock futures for Thursday’s session point to further increases as the vote had one clear victor: business. 

As we’ve described before, stock prices reflect discounted future cash flows -- how much profit a company is expected to make over time, discounted by the level of uncertainty about that prediction. That means that valuation arises from the interaction between:

  • Likely levels of future income

  • Likely future costs

  • Uncertainty about the future

If expectations about income go up, or if expectations about costs or uncertainty go down, the stock rises in price. 

Stocks gained on Wednesday from a significant reduction in uncertainty. Markets historically rise following elections for this very reason, and yesterday’s post-election rally was the largest since Republican William McKinley defeated the populist Democrat Willam Jennings Bryant in 1896 and 1900. The VIX volatility index -- sometimes called the “fear index” plummeted 18% on Wednesday, another sign of reduced market worries.

How can markets increase their level of certainty even before the election has been called? First, markets seem to be betting on a likely Biden victory. While the vote will be close, most of the outstanding ballots are absentee ballots -- just like this point in every election -- and those have heavily favored the Democrat this year. 

We said on Monday that the question would be whether Biden could win enough battleground states by a wide enough margin to keep the contest out of the courts. Trump has already filed lawsuits in Pennsylvania, Michigan, Georgia, and Nevada, but so far none of the suits actually contest the validity of any ballots, just counting processes. It is also unlikely that the number of disputed ballots will exceed the vote margin in enough states to alter election results -- Trump likely has no standing to overturn the case in court. 

The absolute failure of any “Blue Wave” for Democrats also relieves pressure on right-wing judges to buy whatever tendentious arguments the Trump camp makes to stop the vote count. Biden was already committed to roughly the same economic program as Donald Trump; now he will have little to no room for any major changes with regard to business regulation or taxes. 

This means lower expected costs for business -- the second piece of stock price gains. Tech stocks were up big on Wednesday, with Facebook up 8%, Amazon and Google’s parent company Alphabet each up about 6% and Apple up 4%. Any worries they might have had about strengthened antitrust regulation evaporated along with liberal hopes last night. The tech megacaps will continue enjoying monopoly cash flows to their swelling bottom lines for years to come.  

Health care profiteers also advanced for the same reason: Cigna, UnitedHealth, and Anthem stocks each were up by double-digit percentages on Wednesday. Biden ran aggressively against any end to privatized health care (despite large super majorities in favor of socialized medicine), but now even modest “public option” reforms have no chance of passing.  

As for increased income in the future -- the third leg of equity values -- this is more ambiguous. Unified Democrat control of Washington would have meant a large stimulus package early next year. This now seems unlikely, and on Wednesday, Senate Majority Leader Mitch McConnell called for a new, smaller bill during the lame duck session. With House Speaker Nancy Pelosi now substantially weakened after surprise losses in the House, this might be the best markets get. 

And 10-year Treasury Bond yields saw their largest daily decline since the March crash Wednesday, a sign of reduced expectations for growth and economic activity. But lower interest rates also boost stock prices, so business wins again, even if the economy at large struggles -- the story of the last eight months. 

The bottom line: after years of campaigning, hundreds of billions of dollars spent, millions of hours of breathless outrage, and Biblical levels of strategic certainty from experts who got it all wrong -- again -- we’re left with virtually no change whatsoever. Somehow Donald Trump and the Democrats both found a way to lose simultaneously. 

Markets responded Wednesday with a simple message of approval: if it ain’t broke for us, don’t fix it. 

Disclaimer

Our only investment advice: Take a social media break this weekend.  

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Photo Credit: C-SPAN