(Bloomberg) -- Markets are turning increasingly skeptical about the chances of a “Democratic sweep” in November’s U.S. elections. And that’s bad for almost all asset classes.
When Democrat Joe Biden’s poll numbers increased, numerous strategists started talking about the idea of a “Blue Wave,” where his party would retain control of the House and win the Senate. That prospect could be favorable to markets as a Biden presidency is seen adding to the odds of a fresh round of fiscal stimulus.
But now analysts say there’s a good chance the Senate stays in Republican hands, making the passage of a fresh flood of cash less likely. A combination of Republicans retaining control of the Senate, or stimulus being delayed until after the election will hurt economic growth through the first quarter, according to Bloomberg strategist Vince Cignarella. Add to that the current impasse over stimulus, which leaves almost no chance of a deal before the election, and you have a recipe for a market downturn.
“Without ‘fiscal 4,’ it becomes all about the Dems sweeping the Senate to get a significant package,” said Dennis DeBusschere, a strategist at Evercore ISI in New York, referring to a fourth round of stimulus. “With odds of a Senate sweep 57%, anything can happen.”
Monday’s market action looked a lot like a reversal of the “stimulus trade” that bets on a fiscal flood lifting cyclically oriented stocks and stoking inflation. The Nasdaq 100 gained 3.1% Monday, bolstered by Apple Inc (NASDAQ:AAPL). jumping 6.4% and Amazon.com Inc (NASDAQ:AMZN). advancing 4.8%. Growth once again outperformed value stocks and large shares bested small ones, while the dollar rose.
At the same time, the Invesco Solar exchange-traded fund, in a sector that would benefit from a Biden presidency, dropped 3.4%. The bond market is showing signs of concern about bets on the reflation trade.
Read more: Bond Market’s Reflation Bets Face Risk of a Divided Government
“The moves in Amazon and Apple are huge and have a significant impact on the Nasdaq 100,” DeBusschere said. “And many people pointed out some weird options activity. But don’t underestimate the impact of fiscal falling apart on the internals.”
Not everyone is worried. RBC economists Tom Porcelli and Jacob Oubina have said they aren’t sure more stimulus is necessary, an idea backed up by Morgan Stanley (NYSE:MS) strategists including Mike Wilson.
“While additional fiscal support would likely help growth and inflation over the next 12 months, we think it’s important to recognize that a strong macro recovery is already well underway,” the strategists wrote in a note Monday. “Furthermore, this recovery has accelerated without additional fiscal support most (included ourselves) thought was forthcoming a month ago.”
Still, everyone from JPMorgan Chase (NYSE:JPM) & Co. to Credit Suisse (SIX:CSGN) Group AG have pointed to the potential market-friendly effects of a Democratic sweep driving markets.
“Fiscal stimulus = the new QE,” Nomura Securities International Inc. cross-asset strategist Charlie McElligott wrote in a note on Monday.