Market OptimismNovember 9, 2020 11:20 am
Our investment committee went into the election feeling quite positive about the equity markets for 2021. The outlook looked constructive whether the election produced a blue/red wave or divided government. As of this writing, the country is likely to end up with divided government: Democratic President and House of Representatives along with a Republican Senate.
Strategas research has taken a look at the S&P 500 annual performance under partisan control scenarios from 1933 through 2019. A split congress with a Democratic president comes out with the highest average annual returns of 13.6%. Even if a Republican presidency were combined with split government, the average return historically is 13.4%. (A blue wave would have yielded 9.3% annual returns and a red wave 4.9%). It is good to remember that over the history of the last 90 years, the trajectory of the stock market has usually been up during most four-year presidential terms.
But those are the averages, which provide no guaranty of any particular year. So, what is in store for 2021?
To answer that question let’s start with the markets this past week. (We recognize that there are still some who feel that the presidential election has not been finalized, but for this blog we are taking the view that the markets are accepting the President-Elect Biden’s victory). The S&P 500 was up 7.3%, having been positioned for a possible blue wave prior to the election. When the blue wave didn’t materialize, the markets, which support incremental (not dramatic) change, took a more optimistic turn. With the ability of the Senate to check the actions of President Elect Biden and/or the House of Representatives, moderate legislative changes or gridlock became the dominant expectations. Costly programs, such as Medicare for All or the Green New Deal are seemingly off the table for now. And tax increases are doubtful. All of this is good news, as far as markets are concerned.
Gridlock, however, in and of itself is not necessarily a good thing. Doing nothing in the midst of a pandemic, economic crisis, and surge in climatic forces can encourage irreparable harm while stalling any economic recovery. What Wall Street really prefers is selective actions before “good” gridlock sets in.
And here is where personal history could make a difference. The markets are betting that President Elect Biden and Senate Majority Leader Mitch McConnell can work together as they did three previous times in recent history to resolve critical issues. Biden and McConnell brokered three major deals during the Obama Administration when all other efforts at bi-partisan legislation had failed: twice (2010 and 2012) when the country was facing a fiscal cliff from potential increased taxes and spending cuts, and once at the culmination of the Debt-Ceiling Crisis in 2011. If Biden and McConnell can work effectively across the aisle at critical junctures, market analysts feel the next few years could be good ones for stocks.
Two looming hurdles exist, however, before steady economic growth, continued low interest rates and current low taxes can become the status quo and driver of the recovery. These hurdles are the third wave of the coronavirus pandemic and the need to pass an income replacement stimulus package. The big fear is that, in the short term, widespread outbreaks of the virus could lead to localized lockdowns, undoing hard won economic progress. And, with 11.7 million more unemployed people than at the start of the pandemic, failure to provide direct support to individuals, small businesses and certain sectors of the economy could cause undue hardship and a further set back to the economy. Look for both of these issues to take center stage in the next few months, providing some volatility in the markets.
Still, for now, the markets are telegraphing optimism. The resolution of the election has erased the uncertainty of who will lead the nation; there is economic momentum in certain areas of the economy (housing and manufacturing, for example) that are likely to continue; and we now know much more about the virus, as well as the vaccines and therapeutics that can help us target our healthcare response.
It has been a long hard year, one few of us will be sorry to see go. But while the next few months could still be challenging, 2021 offers hope of a sustained recovery in the markets.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.