Elections 2020: Wall Street's red-hot 'blue wave' trade unravels as election outcome hangs in balance

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Although the outcome of the presidential election continues to hang in the balance, one thing is increasingly becoming clear in the early hours after Election Day.

Wall Street’s red-hot “blue wave” trade is at risk of unraveling.

As of Wednesday morning, Democrats reportedly had a net gain of one seat in the Senate. Early Senate race projections from Iowa, South Carolina, Texas and Montana suggest Republicans will retain control. That implies the Senate will stay Republican. The Democrats appear likely to retain House control. Former Vice President Joe Biden is currently ahead in the important Electoral College race, but vote counting in key battleground states continues.

The Democrats required a net gain of three seats in the Senate and Biden to win the White House to wrestle back majority control. Or in other words, usher in a “blue wave” into Washington D.C.

“The partial results so far suggest lower odds that Democrats win both the White House and Senate than prediction markets and polls-based statistical models implied at the start of Election Day,” wrote Goldman Sachs Chief economist Jan Hatzius in an early Wednesday morning note.

Democratic presidential candidate former Vice President Joe Biden speaks to supporters Wednesday, Nov. 4, 2020, in Wilmington, Del. (AP Photo/Carolyn Kaster)
Democratic presidential candidate former Vice President Joe Biden speaks to supporters Wednesday, Nov. 4, 2020, in Wilmington, Del. (AP Photo/Carolyn Kaster)

Investors had positioned themselves in recent months behind the idea of ??a blue wave that will lead to a robust stimulus package within Biden's first 100 days as president. Goldman, for its part, saw a new $2.5 trillion stimulus plan happening rather soon after the blue wave officially rolled into Capitol Hill. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all flirted with record highs in mid-October.

Now Wall Street is starting to unwind on fears of there being either no new stimulus or a far smaller plan sometime in early 2021.

Dow Jones Industrial Average futures — which has flirted with gains and losses since election night — tumbled 119 points today as 5:35 a.m ET. 10-year Treasury yields dropped as investors nibbled at safe-haven government debt amid the uncertainty.

“Under a narrow Republican Senate majority, we would expect no major tax increases but also a fiscal stimulus package of less than $1 trillion,” added Hatzius. That runs counter to what the market had priced into election night.

One sector bucking the early negative action is the Nasdaq.

Nasdaq futures were up nearly 2% as of 5:35 a.m. ET. “Biden with a Republican Senate is really good for tech as well,” pointed out EvercoreISI strategist Dennis DeBusschere.

Investors may want to think carefully about that one, however. Biden has called to repeal Section 230, which could wreak havoc on the business models of tech giants such as Facebook, Google and Twitter. Senate Republicans have also railed against the power of Big tech.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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