A sizeable rally is underway this week on the back of a relatively orderly election process in the U.S.

Despite several states not being “called” yet, the broad expectation is that the election results will be finalized by this weekend or early next week at the latest.

Importantly for markets, no one party is likely to hold the White House and both Houses of Congress (no Blue or Red sweeps).

Based on the results as we know them now, the most likely result of the election will be a Republican Senate and a Biden presidency.

Markets priced in a Democratic sweep and that didn’t happen – the market will not be getting the $5 trillion in stimulus it was expecting. Additionally, depending on the level of dysfunction in Washington, they may even wait until 2021 to enact the $1.5 trillion in stimulus. Additionally, there is likely to be more regulation via executive order, which could be a mild headwind on growth and the chances of more COVID-related lockdowns will rise (although there are issues for 2021).

On the other hand, material tax increases won’t happen, and neither will a re-start of the U.S./China trade war, and both will be macroeconomic positives that should be a sustainable tailwind on stocks.

Bottom Line: I think the framework for this outcome should be the last two years of the Obama administration, where essentially nothing occurred from a policy standpoint.

Outlook Beyond the Election

The election has been the sole focus of markets for the last several weeks, but it’s important to note that there have been several quiet positives that offer support for stock prices over the medium term.

First, corporate earnings were very strong and the resiliency of corporate America in the face of the pandemic is impressive. Second, global central banks are getting back in motion after a few months of dormancy. The Reserve Bank of Australia introduced QE earlier this week, the Bank of England just announced more QE (larger than expected), and the ECB will likely increase QE in December. Meanwhile, the Fed may discuss increasing QE at some point if the economic recovery begins to falter. Point being, the Fed and global central banks are still essentially providing a “floor” on stocks via incredibly accommodative policy, and they are again acting to support economies and markets across the globe. Finally, a vaccine announcement (likely two vaccine announcements) will come by the end of this month, which means that we’re looking at widespread vaccine distribution sometime in early 2021. That will be a major step forward towards getting the economy and the markets back to normal.

Finally, regardless of when, the economy is going to get at least another trillion dollars (and likely much more) in stimulus, either in late 2020 or early 2021. Economic data of late has been very strong – even if stimulus arrives in 2021, while it may cause a drop in stocks between now and year-end, it’ll still be a positive given a six-month time horizon.

The surge in markets this week is likely a ‘sigh of relief’ to the relative certainty of the election combined with the market’s historical preference for a divided government. The outlook over the medium and longer term for stocks remains constructive beyond politics.