Divided Government
Market Perspective 11/5
The financial markets appear to be settling into a divided U.S. government mindset, a tailwind for stock market prices this week.
Stock market volatility declined this week as prices broadly increased and are now on pace for the highest weekly price gain since April. This tells us that stock markets may broadly favor a divided government. There is less uncertainty as neither party can run too far in either direction.
So, what does a divided government look like? Compromise. Healthcare reform, for example, could be more modest. Spending and tax reform will likely be on the table given current debt levels; however, larger scale, sweeping tax reform is unlikely to occur. The next-round stimulus package that has been in congressional discussions over the last several weeks could be smaller (less fiscal stimulus). The Federal Reserve may need to take other monetary actions, and keep short term interest rates low, to spur economic growth (easing of monetary policy).
Infrastructure spending has recently been one area of common ground between parties. U.S. infrastructure is outdated; the American Society of Civil Engineers estimate that trillions of dollars are needed to update U.S. roads, bridges, dams, and other infrastructure by 2025.
While the final presidential election results may take some time to complete, key deadlines are approaching that will eventually expedite any near-term lack of results. The “Safe Harbor” deadline related to contested state results is December 8th. The electoral college then meets December 14th to complete the Certificates of the Vote. There is little doubt that the news cycle velocity will remain high as 2020 continues in this year of anything but ordinary.
Additional notes
U.S. stock prices (S&P 500) increased over 7% on the week with similar results from international stocks; both developed and emerging markets
In a unanimous vote, and as expected, the Federal Reserve Committee announced this week they are holding the federal funds target (short term) interest rate unchanged at a range of 0%-0.25%
Longer-term interest rates moved lower over the past week; the 10-year U.S. Treasury bond declined from 0.85% to 0.77%
October employment data was better than expected, with nonfarm payrolls increasing and the unemployment rate improving from 7.9% to 6.9% (source: bls.gov)
More than 80% of S&P 500 companies have now reported third-quarter results; 86% of the reported companies showed results better than expectations (source: Factset, Inc)