Central bank liquidity, not election results, driving global markets higher

On the eve of the 2020 US presidential election, investors faced a choice between two candidates with starkly different economic visions. Yet the stock market barely flinched. The S&P 500 climbed 2.7% in early Wednesday trading, building on a 6% gain for the week. The VIX, the volatility gauge that typically spikes when uncertainty rises, instead fell 18% on Wednesday alone and dropped 24% across the week. For a market that supposedly abhors the unknown, this was a curious response to an election that remained genuinely close.

The betting markets had sent a different signal. On Tuesday night, as results trickled in, the odds shifted sharply toward a Trump victory, with fortunes swinging rapidly in real time. Most public polling had pointed to a Biden win. But the actual race was tightening in ways pollsters had not fully captured. Yet this dramatic reversal in electoral expectations produced almost no corresponding shock in equities. Stocks simply kept climbing.

The explanation, according to market analysts, lay not in the election itself but in something far larger and more mechanical: the flood of central bank money that had poured into global financial systems since the pandemic began. Bharat Iyer, a senior markets analyst, framed it plainly. The dominant force reshaping valuations and driving equity performance was not the outcome of any election but the liquidity unleashed by central banks in response to the crisis. A Biden presidency or a Trump presidency would shape which sectors and which countries investors favored. But the underlying current lifting all boats remained the same regardless of who won.

This created an odd logical knot in market narratives. Analysts at Nomura Asia observed that stocks were rising partly because a Trump victory now seemed more likely, which meant lower taxes and less regulation. But earlier in the week, when a Biden win had seemed probable, stocks had also risen, on the theory that a Democratic sweep would deliver quick and large fiscal stimulus. The same market had found reasons to celebrate two opposite outcomes. This contradiction pointed to a deeper truth: the election was not actually the story. Liquidity was the story. The market was simply retrofitting whatever narrative fit the day's price action.

The political outcome did matter, but in a narrower way. Republicans had held the Senate while Democrats retained the House, fracturing the mandate for sweeping action. This split government meant that expectations for rapid, large-scale stimulus would need to be tempered. But more importantly, the election result would shape where money flowed within the global system. A Biden victory, particularly if paired with Democratic control of the Senate, would likely benefit emerging markets. His stated positions on trade and immigration were softer than Trump's, and a larger fiscal stimulus package seemed more probable under Democratic leadership. India, as a key component of the emerging market trade, stood to gain from this shift in investor preferences.

There was one more technical factor at play. Investors had hedged their positions ahead of the election, buying protection against a sharp market move in either direction. Once the results were finalized and uncertainty lifted, those hedges would be unwound. The removal of this insurance, analysts suggested, would itself provide a boost to prices—not because the underlying economy had improved, but simply because the protective bets would no longer be needed. It was liquidity working at yet another level, a mechanical tailwind independent of any fundamental news.

What emerged from this moment was a portrait of markets moving on currents largely beyond the reach of electoral politics. Central banks had flooded the system with money. That money had to go somewhere. It went into stocks. The election would determine which stocks and which countries, but not whether stocks rose. The voter's choice mattered less than the central banker's balance sheet.