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Of all the election outcomes, this is the one investors wanted least.

They were expecting a Blue Wave – a Democratic sweep of the White House, the House of Representatives and the Senate – and didn’t get one, even though the polls said they would. What they got instead was a mess. The White House is in limbo, and the victor could be picked by the U.S. Supreme Court.

Donald Trump and Joe Biden could both see paths to victory Wednesday afternoon as the votes in several key battleground states, including Pennsylvania and Michigan, were still being counted (Pennsylvania’s tally may not be known until Friday).

But even if Mr. Biden squeaks out a victory, it seems likely the Republicans will retain control of the Senate, where the Majority Leader, Mitch McConnell, can continue to make life miserable for the House Democrats and their ambitious fiscal stimulus plans. By midday Wednesday, the Democrats had recorded a net gain of one seat in the Senate; they need three to gain control if Mr. Biden is elected president and four if Mr. Trump wins, since the vice-president can cast a tie-breaking vote.

Investors had wanted a clean win by either party. They had assumed Mr. Biden would take the prize and placed their bets accordingly in the days ahead of the election.

On Wednesday, those bets were unwound with alacrity and replaced with volatile trading in the equity and bond markets. The clear winners were the Big Tech stocks, such as Tesla Inc., whose purchases may have been a defensive play. When in doubt, investors often buy trusted stocks that have performed well for them, and Big Tech has been a spectacularly good investment since the pandemic hit. The fairly strong rise in the S&P 500 and the Nasdaq Composite index Wednesday were both driven by technology firms.

The election showed that Americans and their government are more divided than ever and that Mr. Biden, if he wins, will lack a strong mandate to reshape the economy in the time of pandemic. The U.S. economy, like most other Western economies, bounced back strongly in the third quarter after a half-year of hell as the lockdowns shattered output, but now threatens to go into reverse again.

The Democrats' plan, backed by Mr. Biden, was the launch of a stimulus bill worth about US$2-trillion. It would have included a second round of US$1,200 cheques for individual taxpayers, expanded unemployment benefits and financial support for small businesses and students. The Senate Republicans opposed the bill, arguing that the lavish spending was not needed because the economy was bouncing back and the pandemic was politely fading away, even if the opposite was true. They signalled they might support a spending package worth a quarter as much.

The Democrats' bill would have delivered a welcome jolt to the economy, no doubt taking the markets up with it. Absent that bill, small and medium-sized companies that barely made it through the first pandemic wave in the spring may not make it through the second. And the equity markets are unlikely to hold up well if the economy goes into deep recession.

Economists and market strategists essentially see paralysis if the Republicans retain control of the Senate – no matter who wins the White house. In a note, James Knightley, the chief international economist at Dutch bank ING, said: “This is not a good outcome for the economy since the headwinds from rising Covid cases, troubled state and local government finances (that risk further spending cuts and job losses) and falling incomes as unemployment benefits expire are growing in strength.”

The U.S. Federal Reserve, like the European Central Bank, is running out of ammunition and is in no position to pick up the slack if new stimulus spending comes up short. On Thursday, Fed boss Jerome Powell will use the Federal Open Market Committee meeting to call for more fiscal stimulus. He’s not going to get it, at least in the near term.

Meanwhile, the pandemic is getting worse. By Wednesday, Johns Hopkins University had recorded almost 9.4 million infections in the United States and 232,000 deaths – both figures the highest in the world. Every day, fresh data point to a slowing economy, maybe a double-dip recession. On Wednesday, the ADP National Employment Report said company payrolls expanded by 365,000 jobs in October. That’s half the September rate and much lower than the 650,000 that had been forecast.

The U.S. economy is in trouble, and a contested election will only make the situation worse. The best hope is that Senate Republicans will realize the scope of the damage before too long and work with the House Democrats to pass a meaty stimulus package. But don’t count on it, at least any time soon. A deeply divided government could prove to be deeply dysfunctional.

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