Wall Street likes gridlock, regardless of who is in the White House

Initially Wall Street was enthusiastic about the prospect of a decisive Democrat win, with stock futures spiking in anticipation of the massive stimulus flowing from the Democrats COVID relief spending and their multi-trillion dollar clean energy plan.

As it became clear, quite early, that the Blue Wave wasn’t even a ripple – indeed, early in the evening, there was a very real prospect of a Trump second term – that excitement evaporated, only to be quickly rekindled when it emerged that the Republicans seemed certain to retain their Senate majority.

A gridlocked Congress – a Democrat-controlled House and a Republican Senate – means there will be a smaller fiscal response to the coronavirus and no big clean energy or infrastructure investment. Particularly, it means the Trump cuts to corporate taxes and taxes on wealthy individuals will remain intact.

While the Democrats’ platform would have led to a significant increase in America’s economic growth rate the increased taxes would have reduced corporate earnings and ensured wealthy Americans paid more, or at least some, tax.

On balance, it seems, the market is signalling that Wall Street prefers the status quo.

For the big technology and pharmaceutical companies the outcome is definitely a positive, given the likelihood that the Democrats would have targeted those sectors for tougher regulation.

While the overall market ended up 2.2 per cent, the technology-laden Nasdaq index was up 3.85 per cent and the index that includes the biggest of the tech companies, the FANG+ index, ended 4.34 per cent higher. Healthcare stocks also rose.

Congressional shackles

Leaving aside the prospect of protracted litigation and uncertainty, if Biden does replace Trump in the White House there is still potential for significant changes in the way America is governed, and in its relationships with the rest of the world.

Trump has shown, as Barrack Obama did to a lesser extent during his second term when the Republicans controlled the Senate, that a US president still has significant, albeit limited, power to govern via executive orders.

Biden can, and would, replace Trump’s administration and Cabinet with his own. Trump showed it was possible to people the senior ranks of the Washington bureaucracy with his own appointees without Congressional ratification and pursue at least a part of his agenda via controlling the leadership of government agencies.

Biden probably won’t be as aggressive in pursuing that course as Trump – he has respect for Congress and its processes – and may trust in his demonstrated ability to reach across the aisle to create consensual outcomes.

[Trump] is likely to remain a significant and destabilising force in US politics regardless of whether he continues to live in the White House, or is ejected.

Given the Senate majority leader Mitch McConnell’s track record, that might not be realistic but a Biden administration could effect some change and bring back some stability and normality to a government that has been anything but stable or normal over the past four years.

Where he would have far wider discretion is in foreign affairs. US presidents, as Trump has again demonstrated, have far more independence from Congress outside the borders than within.

Biden could seek to undo the damage Trump has done to the relationships with America’s traditional allies and find a more considered, consistent and diplomatic approach to its relationships with its foes, most notably China and Russia.

He could re-engage with the multilateral organisations like the World Health Organisation and World Trade Organisation and all the other international institutions Trump disparaged, undermined and withdrew from.

He could recommit the US to the Trans-Pacific Partnership on trade, or some similar agreement, as part of a more sophisticated strategy of gaining allies to contain China’s ambitions.

Wafer-thin leads

Given the Congressional constraints, a Biden presidency wouldn’t be able to pursue the progressive agendas of the left wing of the Democrats that appear to have been a major factor in turning out the Trump vote, but that probably wouldn’t be his natural inclination anyway.

The frustration of those progressives with the election outcome and their inability to pursue their environmental and social programs, however, do mean that Biden would have some tensions to manage within his own party.

All that pre-supposes that Biden eventually finds his way into the White House.

The wafer-thin leads he has in key states and a court system that is now stacked with Trump appointees means nothing can be taken for granted in an electoral system that is such a complicated patchwork overseen by state-based administrations.

The system is vulnerable to legal challenges, particularly when an election in the midst of a pandemic created its own unique challenges for both voting and the counting of votes.

Trump lost the popular vote again by a resounding margin. He has no second-term agenda – during the lengthy campaign he didn’t articulate any plans for the future — and would likely be even more erratic and belligerent and his administration even more of a revolving door than during his first term. He was preparing for a new post-election purge of senior officials even before the election.

Even if Biden wins, of course, Trump is likely to be a continuing presence. The demonstrated loyalty/adoration of his base in the election is something Trump appears to crave and is also a potentially exploitable asset, both commercially (Trump TV?) and politically.

Whether it is Trump himself, or Donald Junior, or Ivanka, or some other surrogate, Trump has built a political movement and will want to capitalise on it and the control it has given him over the Republican Party.

He is likely to remain a significant and destabilising force in US politics regardless of whether he continues to live in the White House, or is ejected.