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Equity

Markets must beware blue wave complacency

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Equity markets are pricing in a big win for Democrats in the US elections in November, meaning a large post-election stimulus package to help the economy through Covid-19. However, they should be wary as president Donald Trump is far from beaten.

US equity indices are still close to all-time highs, but for equities to maintain their lofty valuations they need a large government stimulus package to be passed in Washington, DC to support the economy though the next stage of the Covid-19 pandemic.

A big Joe Biden win, along with Democratic control of both congressional houses, would create the sort of benign political environment required for a stimulus package to pass.

Biden leads Trump by double digits in most polls, well ahead of where Hillary Clinton was at this stage in the 2016 election.

US markets closed higher on Monday after weekend polls pointed to a big win for the Democrats.

But a smooth election is far from certain. Many voters who have said they will vote for Biden are expected to do so by mail.

This means the votes will take longer to count and gives Trump more opportunity to disrupt the process.

A good night for the Democrats would mean a stimulus is likely, but a contested election would intensify an already toxic political environment.

Equities reversed their good start to the week over Wednesday and Thursday, after US Treasury Secretary Steve Mnuchin said a stimulus deal with the Democrats was unlikely before the election and the focus is back on the months following the vote.

In a chaotic election there is only one way US markets are likely to go, and that is a very long way down.

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