Election's economic fallout

As I write this, they are still counting ballots south of the border, but I have confidence that by the time you read my column it will be announced that Joe Biden is the next U.S. president. 

What does this mean for the markets? The market reaction this past week has been downright puzzling for sure.

The “worst case scenario” for stock markets leading up to the election was a close vote and a contested result – exactly what has occurred. Yet markets have had an extremely strong week, which has left most portfolio managers and economists puzzled.  

The U.S. stock market (S&P 500 index) went up almost eight per cent last week and even the ever-under-performing Canadian market (TSX index) managed to climb four per cent. But that is only short term and what everyone really wants to know is what is to come. 

Regardless of how long President Donald Trump puts up a fight over losing, that noise will go away and a (somewhat?) smooth transition of power will take place in January. 

At that time, Biden will be the president, but Republicans will likely still maintain control of the Senate, which means any economic stimulus package will probably be more modest than it would have been if Democrats controlled the Senate as well. 

For the Canadian economy, the size of the stimulus package matters, especially if trade between our two countries opens back up a little more. For investors, the stimulus size is also important – more so paying attention to which industries the money is going to. 

A big risk for Canada is the clash over the Keystone XL pipeline project – one that was already approved, but Biden opposes. With no good options to send our energy resources to either coast, this was the only viable one left. 

A Biden win also means an attempt to raise taxes for companies and individuals alike. Taxes will likely be the greatest impact of the election since households will have less money left over to spend and companies will similarly have reduced net cash flows. 

Goldman Sachs estimated that proposed corporate tax hikes and increasing social security taxes would reduce earnings for the S&P 500 index that would equate to a nine per cent decline in the value of the index. But again this could only occur if Democrats held control of the Senate, something markets seem to have already concluded won’t happen. 

At the end of the day, any uptick seen from stimulus will likely be offset by the higher taxes and valuations and metrics likely won’t move much one way or the other. 

While Biden has announced many lofty goals on social and environmental reforms, those may all take a back seat to the current pandemic situation that is boiling over around the world. Combine that with a Republican held Senate and much of his agenda will certainly stay in limbo. 

It looks like a very divided country will lead to a divided government, which will lead to very little change south of the border. 

On the plus side, less use of the POTUS Twitter account might lead to a little more global stability and less hostilities? 

Overall, when you compare this outlook to your current financial plan and investment portfolio, there shouldn’t be any real reasons to make any changes.

Stick to your plan and be happy the highly contested and bitter election is now behind us.  

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.