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Democratic presidential candidate former Vice President Joe Biden speaks to members of the media before boarding his campaign plane at Hagerstown Regional Airport in Hagerstown, Md., on Oct. 6.

Andrew Harnik/The Associated Press

The suspense surrounding the next round of fiscal stimulus – will there or won’t there be a deal – has whipsawed markets this week. Investors first pushed stocks up on news of progress between Congress and the White House, only to pull back Tuesday when President Donald Trump said on Twitter that there would be no fresh stimulus. Mr. Trump then backtracked, demanding that Congress pass a relief bill, pushing the market up again.

But beneath the volatility, which reflects investors' reaction to short-term developments, a subtle shift is occurring on Wall Street. Investors and analysts have begun to take into account the possibility that Mr. Trump’s time in the White House may soon be over, as Democratic presidential candidate Joe Biden continues to pull ahead in polls just weeks before the election.

And that is producing some optimism on Wall Street, because many investors believe that the higher Mr. Biden climbs in polls, the lower the chance of a contested presidential election. An election with no clear winner and the fading prospects of another round of stimulus are two of the biggest threats to market stability.

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Mr. Trump’s chaotic behavior in the first presidential debate, and his diagnosis of COVID-19 just days later, have been followed by polls showing Mr. Biden rising in several key swing states. On Wednesday, a new Quinnipiac University poll found that, among likely voters in the swing states of Florida and Pennsylvania, Mr. Biden had widened his lead over the President to 11 percentage points and 13 points respectively.

Also Wednesday, the S&P 500 closed up 1.7 per cent. The index has risen 2.5 per cent since the first debate on Sept. 29. The market moves aren’t huge, but analysts say they are meaningful reflections of investors' thinking at this point.

The outcome of the first debate increased “the odds of first Joe Biden becoming president, but also in line with the Democrats also taking the Senate,” said Shahab Jalinoos, global head of macro strategy with Credit Suisse in New York. “That’s obviously been a tail wind for markets since.”

Unified Democratic control in Washington is not usually high on Wall Street’s wish list, as it is associated with increased regulation and taxes. And some investors continue to have mixed feelings about a potential Biden agenda, which calls for higher taxes on corporations and the wealthy.

But largely, investors are of the view that a “blue wave” victory – in which Democrats retain the House of Representatives and retake the Senate as well as the presidency – represents the best chance to get another large injection of federal money into an economy that continues to struggle. Economists and policy-makers, including the Federal Reserve chair, Jerome Powell, say such assistance is sorely needed, as job growth stalls, layoffs mount and temporary furloughs turn into permanent cuts.

To tease out the underlying views of investors, analysts at JPMorgan Chase & Co. recently assembled baskets of shares in companies they see as potential winners or likely losers in the event of a Biden victory.

Stocks of companies in the “winners” basket included industries such as health care, renewable energy, infrastructure and companies likely to benefit from better trade relations with China. Such companies could benefit from Mr. Biden’s support for the Affordable Care Act, which has funnelled significant amounts of federal dollars into the health care industry. Infrastructure, engineering and renewable energy companies could also benefit from a major stimulus push, aimed in part at countering climate change.

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Potential “losers” included companies with large numbers of minimum-wage workers, defence contractors and energy companies, among others. Mr. Biden’s agenda calls for raising the minimum wage to US$15 an hour, and weapons-makers have been beneficiaries of the Trump administration’s focus on increasing sales of U.S. weapons overseas.

Since early September, “the Democrat Agenda Outperformers have gained 10% relative to the Underperformers baskets, suggesting the U.S. equity markets have been pricing in a higher probability of a Biden Presidency,” the JPMorgan analysts wrote in a research note published last week.

In the government bond market, yields on long-term Treasury bonds – which have been languishing at some of the lowest levels on record – have moved sharply higher over the past week. That suggests some are pricing a combination of faster economic growth, higher inflation and rising government deficits over the future. (Treasury bond prices tend to fall during periods of fast economic growth, pushing yields – which move in the opposite direction – higher.)

“The odds of a Biden victory continue to rise, as do the chances of a blue sweep, and if the recent bid for risk assets is any guide, such an eventuality could prove a decidedly positive event for domestic equities – presumably at the expense of Treasuries,” Ian Lyngen, a bond market analyst with BMO Capital Markets, wrote earlier this week.

That sunnier outlook suggests investors now see an indisputable win for Mr. Biden and the Democratic Party as the most favorable outcome for the market, a conclusion that stems from two lines of reasoning.

For one, a clear victory for Mr. Biden cuts down on the chance of a contentious period after the Nov. 3 election that extends political uncertainty into the foreseeable future. In recent weeks, the possibility of a contested election – or even an outright constitutional crisis – was being priced into markets as Mr. Trump repeatedly refused to commit to a peaceful transfer of power.

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The statements pushed jittery investors to cut back on their stock market risk over the past month. Starting in early September, the S&P fell for four consecutive weeks, coming close to dropping 10 per ent. The likelier Biden is to notch a conclusive victory, the greater the amount of risk of political uncertainty that investors can take off the table.

“The cleaner the win, then the less likely that there is a disputed election,” said Mr. Jalinoos, of Credit Suisse. “Once you downgrade that risk, it tends to be a market positive.”

In recent days, Wall Street analysts have written that the likely large flood of federal stimulus that would follow a “blue wave” could cushion the blow of higher taxes by helping to increase economic growth more than previously expected.

“It would sharply raise the probability of a fiscal stimulus package of at least $2 trillion shortly after the presidential inauguration on Jan. 20, followed by longer-term spending increases on infrastructure, climate, health care and education that would at least match the likely longer-term tax increases on corporations and upper-income earners,” analysts at Goldman Sachs wrote this week.

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