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Elections have consequences, but they may not be immediately clear to markets. Economists at Morgan Stanley look at the risks and opportunities in four possible US election outcomes, a Blue Sweep, in which Democrats win the White House and both chambers of Congress; a Blue Tide, with Democrats winning all but the Senate; a Thin Red Line, with Republicans winning all but the House; and a Red Redux, in which Republicans take all. Ultimately, the best outcome for investors may be a unified government, be it Democratic or Republican. 

Key quotes

“The S&P 500 would sink to 3100 between the election and the presidential inauguration in early January, given a Blue Sweep, versus 3600 for a Red Redux or roughly 3400 for the two other scenarios.”

“Looking at equities elsewhere, overseas markets would likely see an immediate lift, if the election puts Democrats in control. A Blue Sweep could particularly favor European equities because, among other reasons, investors are likely to view Europe as a good relative value in light of increased US fiscal spending and tax policy reform.”

“A Democratic sweep may also benefit emerging market equities, given its association with expectations for more infrastructure spending and rising long-end yields. One notable exception is Russia, which could face oil-price downside and rising investor concern about Russia-specific sanctions risks.”

“In the event of a Republican sweep, equity markets could respond favorably, with the S&P 500 rising from current levels between the election and the inauguration. Telecoms, US energy and asset managers would likely get a boost from expectations for continued deregulation.”

“European equities may also rally on a Red Redux, with healthcare stocks leading the way. Longer-term, however, the relative case for Europe and other global markets might not be as favorable under this scenario, compared with a Blue Sweep.”

“If the election yields a divided government, investors should plan for market detours in many asset classes. In a Blue Tide or Thin Red Line, the S&P 500 could hover around current levels on Inauguration Day. Over the longer-term, however, divided power may carry more risk, particularly for credit and equities.”