It may take a few days before enough votes are counted to determine who won the election, but there are a few preliminary conclusions that can be drawn. As of this moment, the presidential race remains too close to call, although it seems more likely that the Senate remains Republican by a few seats, and the House remains Democratic controlled by an ever so slightly reduced margin. These outcomes seem to be driving the markets.
The likelihood of one-party rule has receded, which takes out the possibility that radical policy changes will be implemented. The likelihood has also declined for a massive fiscal stimulus that would sizably worsen the budget deficit. Similarly, large tax increases are also less likely. So, the size of any new fiscal stimulus package is likely to be more moderate in size, providing less risk of driving up inflation, but also providing less impetus for economic growth.
What is clear is our nation is greatly divided, so compromise on any fiscal package is necessary. As we have seen for some time, compromise is very difficult, especially prior to an election when each side must cater to its constituency. Once the election results are in, real negotiations can begin, with the most extreme positions becoming untenable. Parts of previous fiscal proposals that are likely to be approved would include another round of PPP, additional support for the unemployed but at lower levels than in the last round, and unknown levels of support for states and local government and select industries. Most likely as a separate bill, there could also be funding for infrastructure, with that composition to be negotiated. But a renewal of the expired highway bill is reasonably likely.
The overall magnitude of any fiscal stimulus package is likely to be more moderate, which accounts for the rally in Treasury bonds, since less supply of new issues will be needed to finance an enlarged budget deficit. Stocks have also rallied, presumably because the risk of major tax rate increases have receded, which enhances prospects for corporate profits. The details matter, so any conclusions provided here must be considered tentative pending clarity on the election results.