Markets Poised for Stimulus After Election, but Surprise Trump Win May Derail Stocks

Financial markets have been on a rollercoaster over the past year, and, having weathered the shock of the pandemic are now optimistic on the hopes of a stimulus deal.

The question for traders is now not if, but when it will pass. And how much the next government will hope to throw at it if an agreement isn't reached, or it doesn't pass the Senate in the next two weeks.

Many are pricing in for a Joe Biden victory, trusting the recent polling data that the Democratic hopeful is well ahead of the incumbent, President Donald Trump.

"The backdrop to this whole fiasco is that everyone knows that some stimulus is going to get passed at some point," Edward Moya, senior market analyst at Oanda, told Newsweek. "The size and timing is still unknown."

"You're seeing some optimism in the market, because of the fact that these talks are ongoing," Moya said.

"Markets are pricing in that it's going to be a Biden presidency, and the Democrats have a very good chance of taking the Senate, so, come January, we're probably going to have a stimulus package that's a lot larger than what we're currently discussing if there's no deal reached pre-election."

Moya said that stocks are still being buoyed by the fact that the Federal Reserve is still likely to remain aggressive in protecting the U.S. economy.

"They can't cover a lack of fiscal support but they're going to be doing everything in their power to keep the economy going strong," he said.

Moya believes that the bull case for stocks is still there, the election will just determine how much more stimulus we see.

"With the Democrats it will be a lot more, and that's why I think we're still seeing stocks within a short distance of those record highs."

Other analysts concur with this view.

"We've been talking about this for the best part of 3 months, but it is yet to happen, and while I think there is skepticism that it will be agreed ahead of the election - Mitch McConnell is unhappy that the Whitehouse is apparently caving into Democrat demands - we know a stimulus will eventually come," James Knightley, market analyst for ING told Newsweek in an email. "That could explain why Treasury yields are pushing higher yet equities are struggling right now."

Knightley notes that the election isn't the only thing markets will have their eye on with regards to stimulus. There are also payrolls due on Friday 6 November.

"The recent rise in initial claims and the flatlining of Homebase employment data coupled with remote schooling limiting the usual seasonal uptick in employment means we could get a soft payrolls number - momentum was already fading," he said. "A soft number on jobs would probably be a bigger catalyst for politicians to focus their minds and deliver action."

Gayle Allard, Professor of economics at IE business school, is also believes the stock market reaction, and movement in the dollar, would be muted if a stimulus bill doesn't pass in the next two weeks.

"The markets have learnt to love the idea of a Biden victory," Allard told Newsweek. "They would react well if Biden wins, and I think if there's a surprise Trump victory, or if it gets tied up because of challenges, then they will take it very badly," Allard said.

The market sentiment speaks to the findings from a new survey that more than 70 percent of Americans, including over half of Republicans, support a new $2 trillion stimulus package.

In the latest New York Times/Siena College poll, 72 percent of likely voters backed a $2 trillion stimulus package to extend unemployment benefits, send stimulus checks and provide financial support to state and local governments. Just 21 percent opposed.

Trump has long been fascinated with the stock market, touting a recent bull run as a testament to his success as president. The fact that a Trump win may derail stocks could be an ironic twist in this election saga.

Stock exchange
The New York Stock Exchange (NYSE) is pictured on April 20 at Wall Street in New York City. Traders are optimistic about new stimulus being passed, but, like the rest of the U.S., aren't clear on when that will happen. JOHANNES EISELE/AFP via Getty Images