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Investors Remain Optimistic About a Divided Government

Divided government' is a phrase that masks decay | Star Tribune

By: Verena Manolis 11/05/2020

Up until the day of the election, many Americans, including investors, were anticipating a blue wave. Now that the votes are coming in, the winds have changed and signs are pointing towards a divided government. While Democrats are set to maintain a majority in the House of Representatives, the paths to a blue Senate are dwindling.

Many shareholders see this division as a positive for their stocks, as it will block the chance of “sweeping policy changes” with the ability to decrease profits and hurt the market. Even with Biden in the presidency, any proposed tax increases or fiscal deals such as a pandemic relief spending package are unlikely to be passed. As a result, the U.S. is witnessing a bull market during these days of election uncertainty.

Specifically, many investors are gravitating towards drug companies, health insurers, energy companies, and giant technology companies. With a blue government, these sectors would likely be subject to greater government regulation and would fear reduced profits. Now, with the increasing likelihood of a red Senate, shareholders are predicting a much lower risk of any government regulatory action. For example, Alphabet’s stock rose 4.3%, Amazon rose by 4.5%, Facebook increased 6.7%, and American crude oil prices jumped over 3%. Even the S&P 500, which measures the performance of 500 large companies in the stock market in the U.S., rose over 2% and presented the largest increase in one day it has seen since June.

This rise in the stock market clearly emphasizes the primary reason shareholders have for owning stock: to make money. While shareholders sometimes have ethical or social objectives, this is clearly not their motivation here. Regardless of the ethical implications, many investors are buying stock simply because they see the opportunity for company profits to increase. Alphabet, for example, has been involved in an antitrust suit by the Justice Department, yet this has not deterred investors from purchasing company stock.

While ballots are still being counted, the country is moving in the direction of a divided government, and therefore a lack of the regulations that would have been expected with Democrats controlling the House, the Senate, and the presidency. Government regulations are put in place as a means of establishing rules of conduct for an organization in order to protect all stakeholders involved. While businesses are not often fond of them, regulations do serve the important purpose of making sure business is being done fairly and ethically. If the predictions of a divided government hold true, companies will ideally not take advantage of their reduced regulations, and shareholders will hopefully consider ethical objectives in addition to their desire for money.

Source: Phillips, M., & Nelson, E. (2020, November 4). Stocks Rally as Wall St. Sees Silver Lining in Divided Government. Retrieved November 04, 2020, from https://www.nytimes.com/live/2020/11/04/business/us-economy-coronavirus.

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