As the coronavirus pandemic continues to worsen and President Trump's approval rating sinks, Wall Street analysts are discussing the increasing probability of a "blue wave" Democratic sweep of the House, Senate and presidency.
What it means: Investors have been pricing in a Biden win for weeks, and now analysts at firms like Goldman Sachs, Société Générale, State Street, TD Securities, UBS and others are preparing for a like-minded Congress in his corner.
Why it matters: With a blue wave, Biden could realistically enact major policy shifts such as higher taxes, climate change reform and increased health care spending.
The state of play: That's got a lot of investors designing what Ed Yardeni, president and chief investment strategist at Yardeni Research, calls a “Biden Blue portfolio.”
- "Winners in a blue wave likely would be domestic energy-efficient technologies (e.g., wind and solar), railroads, homebuilders, building contractors, and engineers, manufacturers and material suppliers, broadband network providers, utilities, autos, medical suppliers, and innovative technologies (e.g., artificial intelligence)," Yardeni writes in a recent note to clients.
Yes, but: "A blue wave should be a significant negative for risk assets due to a progressive policy agenda," analysts at TD Securities say in a note.
- In addition to raising taxes, influential liberal Democrats like Rep. Alexandria Ocasio-Cortez and Sen. Elizabeth Warren have advocated for wealth redistribution, wealth taxes and breaking up Big Tech companies.
Yes, but, but: "This could be a challenging scenario for the markets over the next 6 months, but markets will eventually react positively to the increase in government spending," counters Lee Ferridge, head of global macro strategy at State Street.
- That spending could include Biden's proposal for a $700 billion investment in R&D for new technologies and a newly unveiled $775 billion plan to invest in child and senior care, provide family leave, and create 3 million new caregiving or education jobs.
Don't sleep: A blue wave is not a certainty, says Ryan Detrick, senior market strategist at LPL Financial.
- "Since 1928, the stock market has accurately predicted the winner of the presidential election 87% of the time, including every single election since 1984. When the S&P 500 has been higher the three months before the election, the incumbent party usually has won; when stocks were lower, the incumbent party usually has lost."
- "Some good news on the economy in the coming months or progress toward a vaccine could potentially get the S&P 500 back to positive territory for the year ... and it’s possible that may help President Donald Trump’s re-election chances."