Update November 2020

No “blue wave” but Democrats have a good chance of regaining the presidency!


The odds now favor the Democrats winning the next presidency, Congress is likely to remain substantially in Republican hands. Stock markets celebrated this increasingly likely election result with very strong price gains.


The pollsters were wrong again

Again, the polling organizations were quite wrong in their election predictions. A “blue wave”, with a Democrat takeover of Congress, is not in sight.


Most likely scenario: Joe Biden becomes President, but Congress remains substantially in Republican hands

President Trump is not accepting the election results in some states claimed by Democrats. The legal battle has thus begun.

Despite the expected legal challenges, the evidence available today suggests that Joe Biden will be the next US President and that Congress will remain in important ways under Republican control. The following analysis assumes the validity of this scenario and tries to indicate the potential consequences. (See Appendix at the end of this Flash).


Americans choose a balanced distribution of power

With Joe Biden as President, a Democrat-controlled House of Representatives and a Republican-controlled Senate, America has opted for a balanced distribution of power. This means fundamental change in policies will be very hard to implement


Republicans will hinder any big shift towards Democrat policies

Republicans will be able to largely block the agenda of President Biden and the Democrats.This means that there will be no “New Great Green Deal”, with investments in green infrastructure likely to be heavily scaled-down. This prospect probably explains the big post-election gains for oil stocks despite a looming Biden victory. Significant tax increases for companies and the super-rich are also probably “off the table”. Furthermore, a big increase in regulations has become unlikely, something that will greatly improve US economic prospects. Finally, future Covid-related or other rescue packages are likely to be smaller than many Democrats had planned.


Congress will cut the size of bailout packages

It is likely that a Republican Senate will now be able to perform the Federal Budget oversight function even better than under President Trump.


We see the chance of reduced tension in America’s overseas relations

The foreign policy situation is likely to ease significantly, especially in relation to Europe. There is good reason to expect a less adversarial relationship across the Atlantic. But the situation in relation to China could get more difficult. The core of the US-China conflict – global hegemony – won’t go away even if the language becomes more diplomatic.


Strong post-election rally on Wall Street

The S&P 500 has had the best recovery rally recorded immediately following a US presidential election. In our opinion, the financial markets are now counting on the combination of a Democrat President and a Congress which will remain substantially in Republican hands. This is a sort of ”best of both worlds” scenario and, given that markets have often done well when power in Washington is divided, there is some justification for it.


Financial markets are likely to soon shift their focus away from the US election and back towards more general economic and business developments

So far, the US election results appear to have been very good for financial markets, particularly NASDAQ technology stocks. With Congress likely to stay substantially in Republican hands, “real economic policy” will remain relatively favorable for the FANG shares that dominate the US stock market. So, it’s not surprising that the recovery rally focused on these stock market heavyweights. Small and mid-caps, meanwhile, have been hard put to make gains.

With “shrinking expectations” on the size of future rescue packages, the election fall-out has seen US interest rates decline over the entire maturity spectrum. The US dollar is now less “sought after” as US election-related uncertainties have diminished.

The election will soon be “history” for the stock markets. This means that economic developments, the pandemic and the next rescue packages will come back into focus.


The corona virus “second wave” is now in full swing

The second (autumn-winter) wave of Covid-19 is now in full swing throughout the Northern hemisphere. It is increasingly evident that measures originally designed as temporary will have to be reintroduced in order to prevent an overloading of the intensive care units in hospitals and a sharp increase in deaths.


Emerging market countries are also suffering badly from Covid-19

More and more emerging market, hitherto – “growth” economies are now experiencing economic slumps due to the virus pandemic. For example, Indonesia, the largest economy in Southeast Asia, is now experiencing its first recession since the Asian crisis of 1998. Nevertheless, looking at the “big picture”, Asian countries, together with Australia and New Zealand, are outperforming the rest of the world in this Covid-19 impacted environment.


Important news on the vaccine front expected soon

Within the next few weeks, some vaccine developers will report test results for the “late stage” trials required by drug regulation processes. A scenario in which one or more (at least partially effective) vaccines is available within the next year is gaining credibility. But, as with current flu prevention treatments, these vaccines are unlikely to offer 100% permanent protection against all strains of Covid-19.


Additional rescue packages are needed on a worldwide basis

Given prospects for Covid-19, additional government rescue packages are likely to be necessary in practically all countries around the world. Such packages are needed to prevent many small and medium-sized companies from falling into insolvency. We expect that the majority of rescue packages to be implemented will be financed more or less directly by the national central banks in order to keep financing costs of (increasingly out of control) national budgets low. “Financial repression” and the worldwide low interest rate environment look like becoming more and more permanent. This could mean that conventional share valuation models based on historical comparisons are too conservative for the new regime of “markets managed by bureaucrats” and that current estimates of “fair values” are too low.

As an example, the Shiller model is based on normalized profits and thus historic external financing costs. Were it possible to maintain effective financing costs at levels consistent with today’s very low interest rates, fair valuations based on Shiller models would be considerably higher.


Appendix: Who has the easier path into the White House?

If Joe Biden can retain the lead he currently has in Arizona, Nevada and Wisconsin, he should get the 270 votes required to win the US electoral college. His lead looks most precarious in Nevada, where only postal votes still need to be counted and these tend to favor Democrat candidates as Democrats are less likely than Republicans to vote in person. President Trump has to keep his lead in Georgia and Pennsylvania. This is not impossible but difficult, given that it is overwhelmingly postal votes that still need to be counted and (as outlined above) these tend to favor the Democrats.



Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44

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