They’ve faced down everything from the fastest bear market in history to barrels of oil selling for less than nothing. After traumas like that, it’ll take more than a messy election to derail bulls in the 2020 stock market.
A close or contested outcome to the U.S. presidential vote was supposed to be Wall Street’s worst-case scenario. Now, it’s come to pass. Investors needed roughly an hour to shake it off.
As they adjusted to the horse race between Donald Trump and Joe Biden, early overnight volatility in stock futures was replaced by a broad rally. The benchmark S&P 500 Index jumped almost 3%. The tech-focused Nasdaq 100 surged more than 4%.
It’s all a far cry from the dramatic predictions of what a contested result would mean. Remarkable as it sounds, as nerves settle and clarity on the vote emerges, people on the Street are predicting more gains to come.
“With the chances of a significant increase in tax rates and headwinds to cash return largely off the table, the S&P has about 13% upside form yesterday’s close,” Dennis DeBusschere at Evercore ISI wrote in a note to clients. “Either a narrow Biden victory or Trump’s re-election would push that slightly higher.”
Steeled by months of upheaval, buttressed by bottomless Federal Reserve support, that brand of confidence was all over Wall Street the day after the vote. Sure, a decisive victory by either side would have brought clarity, but a divided government comes with upsides, too.
Consider that a President Biden could walk back the trade war, but probably not push a tax hike through a Republican-controlled Senate. Chances of any major legislation passing could be slim. The tech giants leading Wednesday’s bounce may be in no danger of imminent tougher regulations.
Microsoft Corp., Apple Inc., Amazon.com Inc. and Alphabet Inc. were five of the six biggest drivers of the S&P 500’s rally. It’s a return to a trade that because of its haven qualities has been a big winner for most of the year.
“People said back in March and April that tech is a safe play. This sentiment is now returning — big time,” Matt Maley, chief market strategist at Miller Tabak + Co, said by phone. “If a capital gains tax isn’t going to be increased, all those investors waiting to take chips off table in their tech positions are now saying, ‘You know what, I’ll hold on.’”
The downside of a divided legislature is that the stimulus floodgates may not open, and the shares of companies most exposed to the economic cycle are underperforming.