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CBS Money Watch: Wall Street Increasingly Expects a "Blue Wave" in Next Month's Election

October 19, 2020
Image for CBS Money Watch: Wall Street Increasingly Expects a "Blue Wave" in Next Month's Election

Article By Stephen Gandel in CBS Money Watch

Wall Street firms are increasingly advising their clients to prepare for a "Blue Wave" of victories in next month's national election. Such an outcome would land Joe Biden in the White House and give Democrats a majority in both chambers of Congress.

In the past month, at least five of Wall Street's top strategists have sent reports to investors predicting a Democratic sweep.

Goldman Sachs told clients in a research note earlier this week that the odds of Biden winning the presidency and Democrats gaining a majority in the Senate is roughly 65%. Analysts with the investment bank pointed out that stock prices have been rising since September, coinciding with political polls tilting increasingly toward Biden. 

Goldman also wrote that stocks and other investments that tend to rise when investors expect more inflation have lead the market higher since mid-September. This "reinflation trade," as it is called on Wall Street, is being fueled in part by expectations that a Blue Wave next month will increase the likelihood of lawmakers approving another major round of federal spending on unemployment benefits, cash payments for Americans and other stimulus measures. 

Jason Draho, a strategist at UBS, told clients last week that markets were starting to price in a "Blue Wave outcome."

Citigroup's top strategist, Tobias Levkovitz, also puts the odds of a Biden win at 65%. And earlier this week, Morgan Stanley's top U.S. stock strategist, Mike Wilson, said in a podcast published on the financial firm's website that investors now expect a "blue sweep."

Prediction markets, where people wager on who'll prevail on Election Day, also foresee a win for Democrats. According to the Iowa Election Market, which is maintained by the University of Iowa, Biden has a 77% chance of winning. The likelihood that Democrats will gain control of both the House and Senate is 60%, according to the market.

"The consensus view is that a Democrat victory in November will be a negative for equities," said Dubravko Lakos, a top strategist at JPMorgan Chase, in a recent report. 

Betting on more federal spending

The main reason investors appear sanguine: spending. Biden's economic blueprint would significantly boost government expenditures, which economists say ...

To read this article in CBS Money Watch in its entirety, click here.

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