Wall Street Under the Shadow of High Risk U.S. Elections

The New York Stock Exchange has lost ground for the past two months after reaching new all-time lows in early September, ahead of the U.S. presidential election on Tuesday, November 3. Last week, after the beginning of the coronavirus epidemic, the stocks had their worst week since March, with a loss of 6.5 percent for the Dow Jones, 5.6 percent for the S&P 500 and 5.5 percent for the Nasdaq.

In an increasingly politically divided America, in the midst of a coronavirus health epidemic, the atmosphere was especially unfriendly during the election campaign between Republican President Donald Trump and his Democratic challenger, Joe Biden.

As Americans are also called on Tuesday to renew the entire House of Representatives (currently governed by Democrats) and more than a third, or 35 seats, of the Senate (currently controlled by the Republicans), financial markets are also concerning over the general political structure to come.

For the markets, a contested election would be a nightmare.

But what the markets fear, above all, is an outcome too close to be announced on election night, Tuesday, November 3, opening the way for protests. Such a scenario will result in several days or even weeks of uncertainty which would be harmful to the financial markets. The scenario had already taken place in 2000, and it took the Supreme Court more than a month, until 12 December, to determine that Republican George W. Bush had prevailed over Democrat Al Gore.

The episode triggered some stock market volatility (-7 percent for the S&P 500), but the overall political climate was calmer at the time than in 2020. Donald Trump has already made it clear this time that, in the event of loss, he will appeal the election result. He challenged the integrity of the postal ballot system that, against the backdrop of the Covid-19 pandemic, was commonly used by voters. In the event of disputes, analysts expect social tensions and even violence in the country between supporters of both sides.

This ‘nightmare scenario’ must therefore be taken seriously, according to economist NourielRoubini, and could lead to a correction of at least 10% of the financial markets, as well as a decline in government borrowing rates and an increase in gold prices as a safe haven.

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In a Monday publication by the media participating in the ‘Project Syndicate’, Roubini believes that if the victory of Joe Biden is not clearly defined as early as Tuesday’s election night, especially in the swing states of Florida, Arizona, North Carolina and Texas, Trump might launch appeals even before the end of the postal ballot count, paving the way for political and social tensions.

Fate of the U.S. Congress, Democratic “Blue Wave” or status quo?

The other possibilities are much less damaging for the U.S. stock market, aside from this worst-case scenario, which will once again concentrate on the fundamentals of the economy and the resumption of activity in the face of the Covid-19 pandemic.

Although Donald Trump’s much-vaunted growth has been dampened by the coronavirus epidemic, Joe Biden is not the ideal candidate for Wall Street, as he aims to increase taxes on wealthy households and corporations, and tighten regulations.

Nevertheless, if there be a “blue wave,” which would see both houses of Congress dominated by Democrats, markets would live with it. In this situation, the chances of implementing a new wider strategy to help the U.S. economy to cope with the second coronavirus wave would increase. In the medium term, however, for tax and regulatory changes which are not beneficial to Wall Street, Biden will have his hands free.

In addition, because of the possibility of political paralysis, the victory scenario for Joe Biden, with the Senate still dominated by the Republicans, is deemed neutral to negative for financial markets. Finally, the victory of Donald Trump, a situation called the status quo and a Senate pre-dominant by Republicans, is considered optimistic for the Wall Street.

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