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Joe Biden is ahead in electoral college votes, however, the scenario of a Democrat ‘blue wave’ and larger fiscal stimulus measures has become less likely. A contested outcome could delay the final election result and implementation of stimulus. For now, economists at HSBC remain constructive on the US economic outlook, on further fiscal support and loose monetary conditions but electoral uncertainty may cause some near-term market volatility.

Key quotes

“In most scenarios, further pandemic-related fiscal support remains likely. This provides a constructive backdrop for US risk assets amid the ongoing economic recovery and loose financial conditions, supported by the Fed’s ‘lower-for-even-longer’ monetary policy.” 

“We remain overweight on US equities, with exposure to big tech companies and quality names remaining beneficial. Additionally, we believe fresh government stimulus measures could benefit cyclical parts of the market which have lagged in their performance this year and look relatively attractively valued. Strong US consumer demand may also support other global equity markets, particularly those geared to exports.”

“We stay strategically underweight US Treasuries given low prospective returns and bond yields. Although a ‘blue wave’ scenario is now less likely, fiscal stimulus measures are still expected in 2021 which can still push yields higher (prices lower), even if Fed policy action reduces this risk. Recent market performance also challenges the assumption that government bonds can act as a reliable portfolio diversifier.”

“In the event of a delayed or contested election outcome, risks assets could experience some volatility in the near term. Other key near-term risks to the economic and market outlook also require monitoring, particularly virus-related developments.”