The stock market’s near-term fate could be decided by the tight Senate race as stimulus remains in limbo, Morgan Stanley says

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  • With polls increasingly signaling a Biden victory, investors should shift their focus to Senate races, Morgan Stanley said Wednesday.
  • Senate election outcomes “will mean the difference between substantial fiscal expansion and fiscal gridlock,” strategists led by Michael Zezas wrote in a note to clients.
  • Treasurys and West Texas Intermediate crude oil are least priced for a so-called blue wave, the bank said.
  • A Democratic sweep could temporarily drag stocks lower and create a “potential dip-buying opportunity,” the team added.
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November’s Senate elections will determine whether investors can look forward to a wave of new fiscal relief or face off against a prolonged legislative stalemate, Morgan Stanley strategists said Wednesday.

Polls and prediction markets increasingly point to a Biden victory in the 2020 presidential race. Republicans would need a “game-changing event” to win the White House, so investors should now focus on the Senate as a key driver of future policy, the team led by Michael Zezas wrote in a Wednesday note.

“If the Democrats win the presidency, control of the Senate will mean the difference between substantial fiscal expansion and fiscal gridlock, which could challenge some of our colleagues’ more bullish views on risk assets,” the strategists added.

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The chances of Congress passing new stimulus before Election Day are rapidly dwindling as Republicans and Democrats remain far apart in reaching a compromise. House Speaker Nancy Pelosi continues to back her party’s $2.2 trillion bill and has criticized the White House’s $1.8 trillion counteroffer throughout the week.

Senate Majority Leader Mitch McConnell said Tuesday he plans to vote on a smaller aid package in a piecemeal approach that goes against both the White House and Democrats’ strategies.

Democrats currently hold a modest polling lead for taking control of the Senate and gaining full control of Congress. Such an outcome would likely see the Biden administration push for a multitrillion-dollar stimulus measure early next year, the bank said in an earlier note.

Treasurys and West Texas Intermediate crude oil “appear least priced” for a Democratic sweep next month, according to the team.

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Stocks will likely dip in the immediate aftermath of a so-called blue wave, but the strategists expect the downward pressure to be temporary. The turbulence presents a “potential dip-buying opportunity,” they added.

Still, markets aren’t likely to move until a clear victor emerges, and the vote-counting process is expected to take longer than in previous elections. Vote-by-mail tallies are set to take around a week in Morgan Stanley’s base-case scenario. The period of outcome uncertainty will likely delay the market moves anticipated by the bank’s strategists.

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