As the dust settles on the 2020 US Presidential Election, the identity of the winner is now clear: Democrat Joe Biden has defeated incumbent Donald Trump and will become the 46th President of the United States. While Biden will only take office in January, 2021, markets are already reacting to the win, in an overall positive manner.
Market reaction to the US election
Immediately after major US news networks announced that Biden is the President-elect, Wall Street reacted positively. Markets were later boosted further by news of an effective coronavirus vaccine, but that is a separate issue. So why did markets rally after Biden was declared the winner?
Traditionally, Republicans are perceived as better for the markets and are often favoured by Wall Street. So why would they approve of a Democrat like Biden? Well, there are more reasons than one.
Firstly, as amazingly as markets performed during President Trump’s term, reaching never-before-seen heights, they were also extremely volatile — something many long-term investors are not fond of. Moreover, COVID-19 was the most influential factor in markets this year, and Trump’s countermeasures, or lack thereof, caused many Wall Street players to fear the impact of the ongoing pandemic. Biden, on the other hand, started assembling his coronavirus task force the day after he was elected.
Another reason is that Biden is much more moderate than some of his party mates, such as Elizabeth Warren and Bernie Sanders. Moreover, his second-in-command, VP-elect Kamala Harris is considered a friend of Wall Street. Lastly, despite losing the presidency, Republicans will most likely retain control of the US Senate, which means that any major reform will have to be approved by the party which has capitalism embroidered on its banner.
Stock market by president
Despite the above-mentioned notion that Republicans are better for Wall Street, history tells another story. Over the years, markets have performed better overall when a Democrat was in the Oval Office. The graph below demonstrates this by showing how the Dow Jones index performed under the last four Presidents.
The performance of the Dow Jones Industrial Average is considered a gauge of the overall health of Wall Street and of the American economy. Despite reaching record heights under Trump, as the graph above shows, its gain percentage-wise was nowhere near as impressive as its performance under Democrats Obama or Clinton.
The Biden presidency: Possible scenarios
Naturally, there is no way to predict how markets will behave under Biden. Predicting market behaviour is hard enough as it is, but with the term starting next year, things are even more complicated:
- Scenario 1 — Biden rides the wave: Alongside the overall bullish recovery seen in markets since the coronavirus recession, the recently announced successful vaccine trial, coupled with the perceived stability that Biden brings, could serve as catalysts for a lasting bullish trend in markets.
- Scenario 2 — Biden scares Wall Street: Despite being considered moderate, Biden still has plans which may include higher corporate taxes, reintroducing Obamacare and other reforms that could be considered by investors as less market-friendly. If this is the case, Biden may be the bearer of a bearish trend.
- Scenario 3 — Biden changes the balance of power: One of the industries that suffered the most from the coronavirus pandemic is oil. The world’s most traded commodities reached unprecedented lows in 2020 and all those with an interest in the oil market are holding their breath in anticipation of the resumption of global travel and other oil-dependent market segments. However, one of Biden’s key planned reforms is promoting sustainable energy solutions, which, if successful, may dethrone oil. While this may also lead to an increase in other market segments, such as renewable energy, the overall ups and downs on both sides of the energy market may even out, eventually.
Any of the above scenarios could happen, however, it is also possible that Biden’s term will be relatively uneventful, and markets will follow the regular supply and demand patterns. Either way, investors should be on the lookout for new potential investments, as a power shift of this magnitude can present some excellent opportunities.