The Market’s Best of All Possible Worlds

NEW YORK – Even though uncertainty about the outcome of the US presidential election is likely to drag on, the stock market has been rallying. Provided that the election is decided within weeks – rather than months – and that both candidates ultimately accept the outcome as legitimate, business sentiment and household optimism can be expected to remain robust. Indeed, the only surprise this week is how close the Electoral College contest turned out to be. The delay in counting the votes was to be expected, and market ebullience and positive economic sentiment are in keeping with previous trends.

Insofar as the mainstream media’s pre-election forecasts were taken seriously, markets seem to have predicted – right up until November 3 – that Joe Biden would be a shoo-in, and that the Democrats would retake the Senate and maintain control of the House of Representatives. Had that happened, the Democrats might have interpreted their sweeping victory as a mandate for an activist progressive agenda. This likely would have included significant increases in public spending on goods and services (including health and education); business-unfriendly tax and regulatory reforms; more protectionist trade and foreign-investment policies; and far-reaching income redistribution (including boosts to Social Security and unemployment benefits). Markets would have perceived this agenda as bad for risk-asset valuations.

But now that Republicans are on course to retain control of the Senate and made surprising gains in the House, there will be no mandate for a bold Democratic agenda. Any policies that are enacted at all will have to win at least some bipartisan support. Lawmakers will be reduced to bargaining over measures that have broad buy-in, such as business-friendly cyclical fiscal stimulus. Compared to the earlier expectations of a blue wave, markets view this scenario as grounds for celebration.