After a much closer contest than the polls had forecast, markets have been forced to align with a new reality and not the one they were probably expecting. Tuesday's election night did reveal one thing. It showed the Democratic blue sweep of America the pollsters had been predicting wasn't going to materialise.

America now faces the real possibility of having to operate under a divided government and accepting a smaller economic stimulus bill than might otherwise have been the case. Positively, from the point of view of markets, this outcome would effectively take big tax rises under a Biden-led government off the table. It would also make stricter regulations for big business, including technology companies, much less likely than under a Biden landslide. Perhaps because of these factors, markets held up well to the onslaught of this election. Stocks and bonds rallied together last week, as some of the heat of the battle dissipated1. Healthcare stocks led the advance as markets looked forward to a more favourable regime of healthcare benefits under a Biden administration.

For now, as America awaits a stimulus bill, the focus is likely to return to the US Federal Reserve's ability to provide more support for the economy through yet easier monetary policies. That's a positive for bonds as well as equities, and probably another reason why both have performed well over recent days.

Under more normal circumstances, the main focus this week might have been the start of a month-long lockdown in England. Non-essential service providers are set to remain closed until 2 December, further pushing back the recovery for airlines and businesses in the retail and hospitality sectors. There was no breakthrough for post-Brexit trade talks in Brussels this week, negotiators emerging to confirm that fishing rights and state aid for businesses are still the main sticking points. It's understood negotiations will resume in London this coming week. That the EU and the UK are still talking and plan to talk some more implies the UK, as well as the EU, are still seeking a deal. Moreover, it seems almost inconceivable that the present UK government would consider the main outstanding issues important enough to relinquish a free trade deal. Expect talks to go to the wire. 

Much like the US electorate, stock markets remain split down the middle. After almost a year of coronavirus, growth stocks ' those able to increase their earnings irrespective of the economic environment ' have held the lead. Shares offering good value have lagged behind, waiting for a big push upwards for the economy as a whole. In view of developments this week, both here and in the US, the status quo may not be under threat anytime soon. However, in uncertain times such as these, it makes sense for investors to continue to cast a wide net.

About the Author: Glen Callow

Prime Accountants News Centre

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