In the US investors have long supported the Republican party. Now it seems that the American president has gambled away this support to the benefit of Democratic candidate Joe Biden.
For a long time, Wall Street had only two concerns about the upcoming US presidential election. Some feared a chaotic handover of power should President Donald Trump lose the election and challenge the result. Others dreaded a victory for the Democrats because of a fear that their tough economic policies could endanger recent stock gains.
It seemed the only desirable scenario for Wall Street would be Trump's reelection. After all, his track record in the markets is quite impressive. The S&P 500, America's leading stock index, has risen by 50% since he took office, despite the coronavirus pandemic. The Dow Jones and Nasdaq have also hit new records.
The American economy on the other hand is still groaning under the effects of the ongoing crisis. Trump doesn't have the coronavirus under control, nor is a second stimulus package anywhere in sight. This has not only weighed on his popularity among voters, who seem to be turning away from him as surveys show, but also among American investors.
"Not only are markets betting on Biden for now — they seem to favor a significant Democrat win," said Nigel Green, founder and head of deVere Group, a financial advisor. For the otherwise rather conservative Wall Street, it is an unusual change of heart.
Biden has promised billions in investments in the American economy, but at the same time insists on higher taxes and more regulation. "Conventional wisdom suggests a Democratic win would be negative for markets, but there's nothing conventional this time around," said Green.
Stability and security are what investors need now, says Chris Myers, chairman of the financial advisory firm Signum Global Advisors. "People are just exhausted," he recently told NPR radio. The stock markets may have hit new record highs, but Wall Street doesn't like Trump's leadership style. "It's hard to make medium to long-term capital allocation decisions because you never know what his White House is going to do," concluded Myers.
It is above all the "blue wave" that investors long for. In this scenario, the Democrats not only provide the new president but also take back the US Senate. That would put all of Congress and the White House in democratic hands. Economic policy decisions, such as the approval of a second economic stimulus plan worth billions, would then be accelerated.
For a sustainable recovery of the economy, investors are now even ready to accept tax increases and significantly tighter regulation, according to Green. More reliable policy decisions and cooling of the trade dispute with China could even offset any increased costs.
In addition, Biden's infrastructure package and higher overall government spending should ensure that the economy and thus the corporate results of many companies pick up again. That alone could translate into higher share prices in the long term.
In fact, Deutsche Bank experts believe that the Democrats' sweeping victory is the most likely outcome of the election.
Investments in cyclical stocks — stocks that benefit from an economic upswing — are currently increasing on Wall Street. While tech stocks and bonds continue to lose steam, interest in sectors such as renewable energy, building materials and industrial majors is increasing significantly. All those sectors should benefit from a President Biden, who promises higher environmental standards and massive investments in the country's infrastructure.
Looking for answers in Delaware
Wall Street has not been shy in its support of political parties. The election campaign donations of the financial elite have seldom been as high as this year. For the first time in a decade, banks, investment firms and the like have dug deeper into their pockets for the Democrats than for the Republicans. This is remarkable because the financial sector is considered to be the largest financier of political campaigns overall.
According to the Center for Responsive Politics (CRP), financial companies have donated $265 million (€225 million) to the Democrats since the beginning of the year — almost $100 million more than to the Republicans.
"Traditionally, the financial sector is a fairly reliable source of funds for Republicans," said Sarah Bryner, director of research and strategy at CRP. "But this cycle, the trend has flipped."
One reason the Democrats are currently enjoying so much support from the financial sector may be Biden himself. From the beginning of his political career until 2009, the now 77-year-old represented the state of Delaware in the Senate. He made a name for himself as a lobbyist for financial institutions and credit card companies.
"Delaware is home to many major Wall Street companies, so he has relationships already with these people and they trust him," said Bryner. Trump, of all people, gave his democratic challenger the nickname "quid pro Joe."