'Gridlock no matter who wins': Here's what 5 Wall Street experts are saying about the tight US presidential race

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'Gridlock no matter who wins': Here's what 5 Wall Street experts are saying about the tight US presidential race
Tasos Katopodis/Getty Images, Drew Angerer/Getty Images
  • With key battleground states still reporting vote counts, Wall Street is updating its outlook for the election's outcome and market implications.
  • Hopes for the so-called blue wave that many expected are all but dashed as Republicans are poised to maintain control of the Senate and fortify their minority in the House.
  • Even if former Vice President Joe Biden wins, the likelihood of a divided government cuts into investors' hopes for massive frontloaded stimulus.
  • Here's what five Wall Street experts had to say about the election, the chances for fiscal support, and trades for a contested result.
  • Visit Business Insider's homepage for more stories.

The so-called blue wave that many Wall Street banks anticipated failed to emerge on Tuesday night, and top economists are dulling expectations for near-term stimulus and a spate of progressive policies.

The US presidential race remains too close to call as mail-in ballots continue to be counted in key states including Pennsylvania, Michigan, Wisconsin, and Georgia. But congressional outcomes point to resounding wins by many GOP candidates, likely giving Republicans control of the Senate and a boost to their House minority.

Such a divided government would stifle any Biden administration plans for large fiscal stimulus, corporate tax hikes, or other sweeping legislation. Major banks reacted to the shift in expectations, advising clients on how to adjust portfolios for near-term uncertainty and the likelihood of a split Congress.

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Here's what five Wall Street experts had to say about the election, its market implications, and the future of the US economic recovery.

Read more: The 'Blue Wave' in the US election didn't happen. Here's how a UBS investment chief believes investors can trade short-term market volatility and protect their portfolios in the long term.

BlackRock: 'Look through any volatility'

A conclusive presidential-election result "could take a few days or more" to materialize and could very well ratchet up market volatility, analysts at the BlackRock Investment Institute said Wednesday.

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"We prefer to look through any volatility and stay with high-conviction positions amid any sell-offs in risk assets," they wrote. "Likely low trading volumes in this period could magnify market moves."

Among the biggest implications of the election results is the dampened chance of a frontloaded stimulus package. Investors rested hopes for a major relief bill in a Democratic sweep after months of bipartisan negotiations failed to procure a compromise.

A Biden victory and split Congress "would constrain Democrats' ability" to "launch large-scale fiscal stimulus," BlackRock said. A second term for President Donald Trump could yield a larger deal, but the firm said it expects "little public investment in either case."

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Read more: Iconiq Capital, which counts some of the world's most influential families as clients, broke down the investment implications of the US election. Here are the highlights of its 23-page presentation.

Mizuho: 'Gridlock no matter who wins'

After months of speculation, the lack of a party sweep ensures "gridlock no matter who wins," said Steven Ricchiuto, the chief US economist at Mizuho Securities.

"This means the most controversial policy initiatives of either party are off the table for at least the next two years," he added.

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For Democrats, that likely means fiscal stimulus, corporate tax hikes, and healthcare reform. Republicans would likely face an uphill battle to cut taxes and industry regulation.

Still, the presidential election remains too close to call, and the likelihood of a divided government means investors should focus instead on macro fundamentals, Ricchiuto said. Economic growth, corporate earnings, inflation expectations, and Federal Reserve policy will further drive markets, he added.

Mizuho reiterated its view that the S&P 500 will reach 3,800 to 4,000 by the end of 2021 regardless of election outcomes.

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Read more: Famed economist David Rosenberg told us 4 crucial trends won't change no matter how the elections go. Here's how to invest in them all.

UBS: 'Central-bank support will continue to support risk assets'

While Wednesday's headlines will focus on the presidential election and the lack of an immediate outcome, the market cares far more about the path of the coronavirus, said Mark Haefele, the chief investment officer at UBS.

Fiscal stimulus hopes may be dashed because of Democrats' poor performance in key congressional races, but another critical support remains in play.

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"The way the Nasdaq is trading up and the Russell is trading down and the way Treasuries are moving, it looks like there's still a lot of faith that central-bank support will continue to support risk assets," Haefele told Bloomberg TV.

Investors will get their next update on Federal Reserve policy after policymakers' Thursday meeting. The central bank is expected to hold interest rates close to zero and maintain its pace of asset purchases.

If central-bank support and fiscal stimulus gridlock sounds familiar, you'd be right, Haefele said. Elections rarely matter so much on their own, and the path of global economic recovery from the pandemic will matter more for how markets move in the coming months, he added.

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"When you look out to the middle of the year, we're looking at a world that is more digital, more indebted, more local, and the world overall is one that's moving towards sustainable assets — in that picture, things have not changed that much," Haefele said.

Read more: Iconiq Capital, which counts some of the world's most influential families as clients, broke down the investment implications of the US election. Here are the highlights of its 23-page presentation.

Edison Group: 'Probability of a contested result cannot be excluded'

Biden is steadily closing the gap with the president in crucial states as more mail-in ballots are counted. Still, investors shouldn't discount the possibility of protracted legal battles over election results, said Alastair George, the chief investment strategist at Edison Group.

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"Unfortunately, the probability of a contested result cannot be excluded given the multiplicity of ways that a close result could be challenged in the US courts," he added.

Both presidential nominees are confident in their ability to win. Trump prematurely and falsely declared victory early Wednesday and called to stop counting votes in battleground states. Biden has been more reserved in his remarks but indicated on Wednesday that he saw victory on the horizon.

Both campaigns boast strong legal teams ready to contest close results. But a court challenge could give way to "months of delay and more importantly the risk of policy paralysis at a critical time for the US economy," George said, adding that investors should be prepared for such an unprecedented turn of events.

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Read more: From flipping burgers at McDonald's to a self-made multimillionaire: How Willie Mandrell leveraged a simple real-estate investing strategy to acquire 40 units and achieve financial freedom

JPMorgan: 'Leaning towards a familiar outcome'

Even though a final result may not emerge for days, "the most unusual US election in modern history is leaning towards a familiar outcome — a divided government," said John Normand, the head of cross-asset fundamental strategy at JPMorgan.

Congress is likely to remain split, an outcome that practically guarantees Democrats can't embark on the fiscal spending spree they likely hoped to.

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Investors still expecting large-scale fiscal easing should park cash in short-dated bonds, cyclical stocks, and infrastructure trades in commodities, Normand said. Even if a major deal is dashed, a smaller stimulus package is still on the table.

A near-term vaccine breakthrough could also provide a boost to economic growth, Normand added.

Now read more markets coverage from Markets Insider and Business Insider:

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