- The market narrative on what a “blue wave” in November could mean for stocks has flipped over the past two weeks, UBS said in a note on Monday.
- The prevailing market narrative over the past few months that election victories for Democrats would hurt stocks because of the potential for higher taxes is now dead, according to UBS.
- Instead, expect stocks to move higher if there’s a blue wave, and don’t be surprised if investors are disappointed if it doesn’t happen, UBS said.
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Throughout 2020, the consensus view has been that a Joe Biden victory and a “blue wave” in November would be bad for the stock market because of the potential for higher corporate taxes and more regulation.
But that market narrative has been flipped on its head in the past two weeks, UBS said in a note on Monday.
Now investors expect that a Biden victory and Democratic sweep in Congress could be a catalyst for a reflation trade, in which cyclical and value stocks trade higher and the US dollar weakens, further helping US stock prices.
The impetus for a change of heart among investors is threefold, according to UBS:
- “The inability to pass a major fiscal package prior to the election means that it’s increasingly likely to be the Democrats’ top priority after a Blue Wave outcome.”
- Higher taxes will be a 2022 problem for investors, not a 2021 problem.
- “Biden’s widening lead in the polls and prediction markets, and along with it the likelihood of a Blue Wave, is reducing election uncertainty,” UBS said, adding that a delayed or contested election would be more unsettling to investors than a Democratic sweep of the White House and Congress.