North American stock markets surge on continued gridlock following U.S. election

North American stock markets surged higher in the aftermath of a close U.S. election that will likely result in a continuation of a divided government.

“A split Congress is a recipe for inaction when it comes to major initiatives and potentially sweeping regulations. So investors interpret that as kind of maintaining the status quo,” said Angelo Kourkafas, an analyst on the investment strategy team at Edward Jones.

Pre-election forecasts of a possible blue wave with Democrats winning the White House and both houses of Congress now appear unlikely no matter who ultimately becomes president. Republicans lead in several Senate races that could allow them to maintain a slight majority while Democrats won control of the House of Representatives.

Meanwhile, President Donald Trump and Democratic challenger Joe Biden are locked in a tight battle in three key battleground states. Results in Wisconsin, Michigan and Pennsylvania are too close to call.

The likelihood of a divided Congress dials back expectations about Biden’s proposal for large tax changes that would threaten the tech surge, but also a large fiscal stimulus and infrastructure bill.

“(Markets) like gridlock because it means no big changes that could disrupt things,” Kourkafas said in an interview.

In Toronto, the S&P/TSX composite index was up 105.75 points to 16,044.90.

The Dow Jones industrial average was up 696.29 points to 28,176.32. The S&P 500 index was up 101.37 points to 3,470.39, while the Nasdaq composite index was up 452.48 points or 4% to 11,613.05.

The renewed threat of a contested election that is ultimately decided by the courts would likely trigger some short-term market volatility even though the economic recovery will endure regardless of the election result, say market observers.

“The more messy it gets it creates that uncertainty, especially with Covid-19 raging pretty bad in the U.S.,” said Vik Singh, professor at Ryerson University’s Ted Rogers School of Management.

He noted that the market dropped around 10% during the protracted legal battle following the 2000 election that was decided by the Supreme Court in favour of George W. Bush.

Singh said he doesn’t believe the market really cares who wins the presidency.

“It’s the orderly succession and if that doesn’t happen in an orderly way, I think the market’s are going to go through quite a bit of turbulence in the coming days.”

Colin Cieszynski, chief market strategist at SIA Wealth Management, said he’s cautious about how long Wednesday’s “burst of enthusiasm” would last.

“We’re still in a very uncertain time on a number of fronts, so yes we’re getting a relief rally here but how sustainable it will be is very questionable,” he said.

Meanwhile, the U.S. dollar had some sizable swings overnight but has ended up flat.

Cieszynski said currency market investors appear to be taking a wait-and-see approach.

“The U.S. dollar has been holding steady, the commodities were picking up a little bit as well today crude oil is up so overall in the overall so far the market seems to be taking the results fairly well,” he said.

The Canadian dollar was trading at 76.27 cents US compared to an average of 76.07 cents US on Tuesday.

The December crude contract was up US$1.32 at US$38.98 per barrel and the December natural gas contract was unchanged at US$3.06 per mmBTU.

The December gold contract was down US$15.80 at US$1,894.60 an ounce and the December copper contract was up 1.45 cents at nearly US$3.11 a pound.