It is only perfect that a year as tumultuous as 2020 be concluded with one of the most volatile elections the free world has ever seen. Neck and neck are Democratic challenger Joe Biden and incumbent Republican Donald J. Trump; this affair has solicited the most voter turnout the US has ever seen, with over 150 million Americans showing up to cast their ballot in person, or, controversially, send them in via mail-in voting due to COVID19 complications. The overall result of this is a country in limbo as an election stretches on with votes continuing to be counted and even more being cast in some cases. Switching the paradigm, financial markets are very much so affected by the political sphere and the magnitude of these afflictions is further exacerbated in today’s environment by the extreme polarization of the political left and the right. While the old adage is that markets crave certainty, the interesting fact regarding this week’s political limbo due to the extraneously ongoing election is that markets have appreciated.

This is due to the emergence of a winner without a major hiccup. More importantly, the so-called Blue Wave, expected prior to the elections, did not materialize. With the Blue Wave scenario, in addition to the current control of Congress, Democrats will be taking the presidency and the senate.  That would have led to a major shift in fiscal policy with a large stimulus package, a rollback of the tax cuts that Trump initiated and increased scrutiny and antitrust proceedings to the mega tech sector. It is also synonymous of a weaker USD and gains in commodities including Gold. The actual outcome, or apparent as of this writing, is the Democrats taking the presidency while the senate remains under the Republicans control, or the so-called gridlock. That means that Trump-era tax cuts may not be rolled back, at least not immediately, and fiscal stimulus, though likely, will probably be scaled back from what it would have been under a Blue Wave as the Senate will have the ability to oppose congress proposals. 

To add to this interesting mix from the Nov 3 elections, news on the vaccine front on Monday Nov 9, i.e. on the first week following the elections, will likely constitute a game changer. Pfizer Inc. and BiNTech SE reported their successful, over 90%, Covid-19 vaccine trial results. The news sparked optimism around the globe that there was at the end of the confinement and lockdowns tunnel. With Mr. Market being a buyer of the 12 month forward view, investors rushed to bid up the companies, mainly in the cyclical and small cap sectors by rotating away from the stay-at-home and work-at-home stocks that benefited from the pandemic, mainly tech stocks. Monday witnessed multiples of standard deviations in the momentum factor to the downside, led mainly by tech stocks, to the downside, as well as multiple standard deviations in the value factor to the upside, led mainly by the cyclical stocks. 

The above events and underlying currents can be visualized in one single image. The chart below highlights the evolution, post-election day, of select equity futures (ESZ0 = S&P500, RTYZ0 = Russell2000, NQZ0 = Nasdaq100), Gold (XAU) and the USD Index (DXY). Following the elections, from Nov 4-6, the markets gained, with Nasdaq100 outperforming, and the USD weakened as the risk-on took off. As the vaccine news hits on Nov 9, small caps Russell2000 took over while the Nasdaq100 tech stocks tumbled. The revival of the value/cyclical sectors led to gain in the USD and Gold tumbled.

For asset managers, risk management is asset management and markets are affected by many external factors, including those by policy makers. Now more than ever this is the case as governmental decisions result in economic stimulus that can make or break markets and in the world’s current case, cause them to develop an addiction that makes their use even more levied. The next administration will be responsible for cleaning up the economic mess that the COVID19 pandemic has caused, this means setting the fiscal and monetary policy that will either allow the countries of tomorrow to survive or thrive given the current state of affairs. The delicate situation as it stands now is at a tipping point between a possible lost decade or another era of expansion, as asset managers we must be able to predict and weather all outcomes.