Markets despise uncertainty. But as Americans tensely wait for the outcome of the US presidential election, the country's stocks have rallied. A lot.
What's happening: Early Wednesday, it looked like Wall Street could be facing its nightmare scenario: a contested election that could be drawn out over days or even weeks. As the day went on, however, investors became more confident that orderly vote counting in battleground states would produce a clear victory for former Vice President Joe Biden.
"What you are getting is a sense that you're not going to have extreme disruption in the wake of the results," Paul Donovan, chief economist at UBS Global Wealth Management, told me.
The S&P 500 rose 2.2% on top of sizable gains earlier in the week. The Dow increased 368 points, or 1.3%, while the tech-heavy Nasdaq Composite shot up nearly 3.9%. US stocks are rallying again in premarket trading.
Nothing is settled. While CNN has called Wisconsin and Michigan for Biden, it has yet to forecast a winner in the key states of Pennsylvania, Georgia, Nevada and Arizona. (Biden holds a 253-213 lead in the Electoral College. A candidate must reach the 270 mark to win the presidency.)
Meanwhile, President Donald Trump has launched a flurry of lawsuits designed to stop the former vice president from getting over the line, and his campaign is laying the groundwork to challenge Pennsylvania's results at the US Supreme Court.
Yet Wall Street traders are expecting a level of certainty to materialize in short order.
"As far as the markets are concerned ... there is a difference between a contested election with no winner being declared by the news networks, and a contested election where the news networks have declared a winner," Donovan said.
The Congress question: Wall Street had put its money on a "blue wave" in which Biden takes the White House and Democrats regain control of the Senate. That would have paved the way for a generous stimulus package to help the US economy through a difficult leg of the pandemic.
But Republicans have dramatically outperformed expectations, and investors are now betting that Republicans will retain their Senate majority.
The adjustment in expectations isn't fomenting fear, though. That's for two main reasons:
- At a press conference Wednesday, Senate Majority Leader Mitch McConnell, who won his election, called for a stimulus agreement to be finalized "before the end of the year." The package may be more modest in scope, but investors are pleased with that timeline.
- Wall Street historically likes divided government since it limits policy overhauls that eat into corporate profits. Investors think that with Republicans running the Senate, Democrats have less of a chance of raising corporate taxes, which had been viewed as a key risk.
"The status so far: unclear on the next president but fairly clear that he'll face Congressional resistance on anything transformational, whether on the budgetary or regulatory front," John Normand, JPMorgan's head of cross-asset strategy, said in a note to clients. "That is great news for those who think that government inaction is generally good for asset prices over the medium term."
What's next? The race could still change, and the economic backdrop remains murky. But Donovan said he expects US stocks to keep climbing so long as activity in the country remains fairly normal despite a spike in Covid-19 infections.
"Fear is not rising and people are not dramatically changing behavior, so the economic consequence is relatively slight," Donovan said.
This week puts central banks back in focus
The world's top central banks have had a leading role in guiding countries and markets through a difficult year. Now, faced with an escalating pandemic and the prospect of a divided government in the United States, their influence is only poised to increase.
The scene: If Republicans retain control of the Senate but Biden takes the White House, investors still think additional stimulus measures can be passed quickly. But the package is likely to be smaller than in a "blue wave" scenario where Democrats control both houses on Congress.
That would increase pressure on Federal Reserve Chair Jerome Powell to take dramatic new action as coronavirus cases surge, raising the specter of new restrictions.
The United States posted more than 100,000 new Covid-19 infections on Wednesday. It was the first time the country reported a six-figure number.
"The uncertainty, and the Democrat[s] inability to gain control of the Senate, will reduce the scope for a near-term fiscal deal," Societe Generale strategist Kit Juckes told clients Thursday. "That just places even more emphasis on the markets' best friend, Jay Powell."
The question is what Powell can do. The Fed has already pushed interest rates to near zero and added trillions of dollars in bonds to its balance sheet.
"No central bank wants to admit that it's out of firepower," former Federal Reserve Bank of New York President Bill Dudley wrote in a column for Bloomberg last week. "Unfortunately, the US Federal Reserve is very near that point."
The Bank of England, which announced Thursday that it would increase its purchases of UK government bonds to £875 billion ($1.1 trillion) as the country enters a second national lockdown, faces similar concerns.
Discussion is ramping up that the central bank may have to follow its counterpart in Europe and push interest rates into negative territory for the first time. Given that the United Kingdom could face a messy rupture in trade with the European Union at the end of the year, the bank has said it intends to keep its options open.
Uber and Lyft win big in California
California voters have passed a costly and controversial ballot measure to exempt firms like Uber and Lyft from having to classify their gig workers in the state as employees rather than as independent contractors. For these companies, it's a major win, my CNN Business colleague Sara Ashley O'Brien reports.
Backed by more than $200 million from Uber, Lyft, DoorDash, Instacart and Uber-owned Postmates, Proposition 22 is the most expensive ballot measure in California's history, according to Ballotpedia — underscoring how important its passage was to the future of their businesses.
A reclassification of gig workers would have been a radical shift for the companies, which grew rapidly by amassing huge fleets of workers who don't receive the benefits they'd be entitled to as employees, such as minimum wage, overtime, paid sick leave and unemployment insurance.
While Prop 22 offers some benefit concessions, it does not provide explicit protections like workers' compensation, unemployment insurance, family leave or sick leave, and it does not allow workers to unionize.
Terri Gerstein of the Harvard Labor and Worklife Program and Economic Policy Institute told CNN Business that the result will "leave thousands of California workers in a precarious and perilous position." Companies like Uber, meanwhile, are now confident they can win labor battles in other states, too.
Investor insight: Want evidence the result is a big deal? Shares of Uber jumped nearly 15% Wednesday on the news, while Lyft's stock rallied 11%.
Alibaba, AstraZeneca, GM, Papa John's and Vista Outdoor report results before US markets open. Booking Holdings, Caesars Entertainment, Cloudflare, Live Nation, Peloton, Square, Uber and Zillow follow after the bell.
- Initial US unemployment claims for last week post at 8:30 a.m. ET.
- The Federal Reserve's latest policy announcement comes at 2 p.m. ET and will be followed by a press conference.
Coming tomorrow: The first post-election US jobs report could arrive as votes are still being counted.