Investors are doubling down on the stock market as the two candidates locked into a tight race on Election day. Historically speaking, markets have always fared well on this day. Between 1984 to 2000, the S&P500 rose 0.9% during the 10 election cycles. This year the Dow rose by 2.1% or 555 points with gains starting overnight. It is said to be the biggest percentage gain for an index since July. A big reason for this jump was investors’ optimism in declaring a clear winner on the day.
But results have been too close to call and this has created a reversal on many early bets. Different industries are now experiencing an uneven rally in stocks. The tech and healthcare sectors are seeing big gains while utility and financial stocks are lagging. Here’s a closer look at why the markets gained despite an uncertain election.
A historic election
The 2020 election is one of the most polarizing in American democracy but also a historic one. For the first time, more than 100 million people have cast their ballots before election day. This is in addition to a surge in the number of mail-in ballots as people tried to avoid crowded polling places. The large influx of votes this year also creates a lot of uncertainty on when the results will be known. States will require additional time to physically count all the votes that have mailed in.
However, much of the market has warmed to the idea of the so-called “blue wave.” This is the potential outcome where Democrats will have control of both the White House and Congress. Such a situation would increase the likelihood of the approval of a larger stimulus package which will spur economic activity. It is estimated that the Government will add $2.2 trillion to the economy if Democrats emerge as the winners.
Ultimately, there are two key reasons for the rally in the indexes on Election Day. One, the markets may be retracting from last week’s losses. All major indexes saw their worst weeks since March, leading up to election day as Covid infections rose. The second reason is that no matter who wins this election, a short-term fiscal stimulus will be sanctioned.
The market rally by industry
The major indexes saw a strong rally on election day but not all the industries experienced an upward trend in prices. For instance, in the tech sector, Apple and chipmaker Nvidia were among the top winners. In the days leading up to the election, a Democratic sweep had tech investors concerned about a high capital-gains tax as reported by The Wall Street Journal. But with Republicans expecting to gain Senate control, worries have been put to rest.
On the flip side, treasury yields have seen a reversal with a decline of 0.77%. This asset is considered to be a key indicator of market sentiment. When yield prices are low, investors are less confident about economic growth. A fiscal stimulus will be available regardless of who wins the election but a Republican-controlled Senate would imply a smaller fiscal stimulus. This will also mean a longer road to recovery for the economy.
International markets mirrored the rally in the U.S. Asian markets all closed in the green with Japan’s Nikkei and the Shanghai Composite Index growing by 1.4%. In Europe, Britain’s FTSE 100 and France’s CAC were up by 2.3%.
But what does a Dow rally mean for the long-term?
According to The Wall Street Journal, Jason Pride, a chief investment officer at Glenmede believes that there are no long-term implications to market movements. The firm conducted a historic study of the changes dating all the way back to 1872. They concluded that movements in the long-term market performance only changed 1-2% regardless of who held the White House or the Senate.
Nevertheless, the rally reflects a reckoning of change. The outbreak of the coronavirus has wreaked havoc on the economy and the path to recovery is still unclear. Markets are hungry for government aid, resulting in a strong rally this year. But it’s also worth noting that the markets go up and down every single day and the Election Day surge may only be short-lived before the markets pullback once again.