What does this US political wreckage mean for the economy and financial markets?

This inconclusive and likely contested result is the worst one imaginable for markets and the US economy. How do investors “price in” a fractured polity and broken institutions? Ben Chu explains

The reaction in financial markets overnight, on the face of, was a rational processing of the new reality that there is no “blue wave” of Democrat victories.  (REUTERS)

Investors, they say, hate uncertainty. Well, they’re going to really hate the morning of 4 November 2020 – and quite possibly the days and weeks that follow.

What makes the apparently inconclusive result of the 2020 presidential election even worse for investors is that financial markets had been primed, if not for certainty, then perhaps for the closest thing to it in politics.

Polls suggested a “blue wave” of Democrat victories – not just a comfortable win for Joe Biden against Donald Trump in his race for the White House but also the Democrats taking control of Congress too.  

This would have enabled the Democrats, so the logic went, to enact something close to the full $2.5 trillion stimulus package proposed by Mr Biden’s economic manifesto.

Now, of course, not only is the White House a toss-up, but it’s increasingly clear that the blue wave was barely a ripple. So even if Mr Biden himself manages to squeak through to the White House he almost certainly won’t have the political clout in Congress to implement anything like as ambitious as his original spending plans.

The reaction in financial markets overnight, on the face of it, was a rational processing of this new reality.  

The price of US government bonds rose sharply, in expectation of no substantive new state stimulus spending. The dollar strengthened against other currencies for the same reason.

But, in truth, such calculations are something of a sideshow to the main hazard on the horizon: the prospect of a result that might be contested bitterly in the courts, hinging on the validity of posted ballots. And looming behind that is the possibility of a constitutional crisis, if the arbiter is a Supreme Court onto which the president forced his own justice, Amy Coney Barrett, only weeks ago.

It was Trump’s false claim of voting fraud on Twitter that sent US stock price futures down sharply.

It’s often said that money doesn’t care about politics – that market movements reflect profit opportunities rather than moral judgements. True enough most of the time. But that’s because politics in the West has generally provided a stable framework for markets and the participants to make their judgements.  

The danger at the moment is that that stable political framework might be put under the gravest strain seen in living memory if we end up with an election outcome that half of the country believes is illegitimate and refuses to accept.

How markets will react to that is anyone’s guess. How do investors “price in” a fractured polity and broken institutions?

It’s easy to forget in all this that the US economy is still in a deep pandemic-induced recession, with output still well below its level earlier this year and 12.5 million Americans without jobs (and whose extraordinary income support from the Federal government had expired).  

And the pandemic itself is far from over in the US, with 80,000 new cases being registered a day this week. There are also over 800 deaths a day. Both counts are rising.

This is an economy that needs a coherent plan from political leaders to get the virus under control, to shore up households’ incomes and to stimulate overall activity to prevent long-term damage to America’s productive capacity.

What chance of any of that happening in the wake of this morning’s non-result and the wreckage of American politics that now stands revealed?