Uncertainty is the name of the game as the outcome of the US presidential election remains up in the air. And the world is unlikely to know who will walk away with the keys to the White House anytime soon.
With Joe Biden potentially edging towards victory, Donald Trump's team has already filed lawsuits in 2 critical US states – Pennsylvania and Michigan – to contest the late vote counting. Trump also wants a recount in Wisconsin, which Biden narrowly won.
And speaking from the White House, Trump said, "Frankly we did win this election…. We will be going to the US Supreme Court. We want all voting to stop."
Isn't this the worst possible outcome for share prices?
A contested election was meant to be the worst possible outcome for global share prices. Yet all the major US and European indexes closed strongly in the green.
Tech shares led the charge higher. The tech-heavy NASDAQ 100 Index (NASDAQ: NDX) closed up 4.4%. It's now down just 5.2% from its 2 September all-time highs.
It's a similar story here in Australia, with the S&P/ASX 200 Index (INDEXASX: XJO) up 1.19% at the time of writing. It's now up more than 3% since Friday's closing bell.
As in overseas markets, ASX tech shares are handily outperforming.
The S&P ASX All Technology Index (ASX: XTX), which contains 50 of Australia's leading and emerging technology companies, is up 2.0% at time of writing and 6.0% since the end of Friday's trading.
Not surprisingly, then, the share price of BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC) is also gaining strongly. The exchange-traded fund (ETF) aims to track the performance of the All Tech index. The ATEC share price is up 2.1% today, and 6.7% since Friday.
What's going on with the markets, and what can we expect?
If the polls were to be believed – they're not – then Joe Biden and the Democrats would have swept into the White House and ruled both houses of Congress in the so-called 'blue wave'.
That would likely have meant an increase in capital gains taxes and a repeal of Trump's corporate tax cuts, while the Democrat's much larger stimulus package would likely get the green light.
Now it looks like the Republicans will hold onto the Senate while the presidential winner remains in doubt.
To get a better idea of why this is seeing shares rallying, and tech shares in particular, we turn to some of the market experts.
Alicia Levine is the chief strategist at BNY Mellon Investment Management. She noted (as quoted by Bloomberg):
Part of what is going on is tech is rallying strongly, which is pushing the market up, and the reason tech is rallying is because it sold off, it was uniquely exposed to higher yields, higher taxes. That created a viscous reversion trade into cyclicals with the expectation yields were moving up with the prospect of further stimulus.
Matt Maley, chief market strategist at Miller Tabak + Co agrees that investors in tech shares are breathing a sigh of relief on the tax front (quoted by Bloomberg):
People said back in March and April that tech is a safe play. This sentiment is now returning – big time. If a capital gains tax isn't going to be increased, all those investors waiting to take chips off table in their tech positions are now saying, 'You know what, I'll hold on.'
Where to next for share prices?
With share markets already having posted big gains over the past days, has the train left the station?
Hardly, says LPL Financial's Ryan Detrick (quoted by the Australian Financial Review):
We don't know who will be the next president as of Wednesday morning, but we do know that stocks tend to do well the final two months of an election year, in particular November. Of course, 2020 isn't like any other year, and we still could be a ways away from who the winner will be.
One of the big takeaways so far from Tuesday night is that the Senate likely will stay Republican, meaning we may have a divided Congress. The chances of higher taxes and more regulation likely took a hit under this scenario.
This could be a nice tailwind for stocks, as the S&P 500 historically has done quite well under a divided Congress, up more than 17 per cent on average. Additionally, in years with a divided Congress, stocks have been higher the past 10 times, with 2020 potentially being the 11th in a row.
Evercore ISI's Dennis DeBusschere is also bullish on the closely contested outcome of the election, writing in a note to clients (from Bloomberg):
With the chances of a significant increase in tax rates and headwinds to cash return largely off the table, the S&P has about 13% upside from yesterday's close. Either a narrow Biden victory or Trump's re-election would push that slightly higher.
Whether or not DeBusschere and Detrick are proven correct, we may have to rethink the old adage that share markets hate nothing more than uncertainty.
If you're still sceptical, just have a look at the Afterpay Ltd (ASX: APT) share price. Shares in the buy now, pay later giant are up 3.03% so far today, and more than 7% higher since Friday's close.
At the current price of $103.80, the Afterpay share price is once again at a new record high.
