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It can be alarming to see how quickly the market can surge. By understanding the components of what went into the market rally, market moves make more sense.
Post election market outlook
Michael Carlin, AIF®, President of Henry+Horne Wealth Management
The 2020 election will go down in the record books for a multitude of reasons. Early voters cast ballots in droves, with more than 101 million ballots sent largely through the mail. Not only that, despite surging COVID-19 numbers in the United States, the total vote count put the ballots cast count into record territory on pace to surpass the original record set in 1960. The deluge of advertisements across media outlets also buried previous records. My favorite advertising spend statistic – in 2016 both Trump and Clinton spent a staggering $81,000,000 in Facebook advertisements which seemed impressive but pales in comparison to the $107 million Biden spent, outdoing the $94,000,000 the Trump campaign spent on the social media website.
The economic impact of the election was hotly contested and debated prior to the election and depending on the outcome, the market reaction was feared by many. Once the election settled, what actually happened was the market bounced up significantly, surprising many. Going into the election, businesses and consumers alike held onto hoards of cash in amounts never before seen.
As the dust started to settle on a Biden presidential victory and how the market interpreted the victory, several trends started to emerge.
- Healthcare and tech stocks soar – Why did this happen? Once the concerns of a “blue wave” Democratic sweep dominating the political landscape faded, the fear of heavier regulation in the healthcare sector took hold as the odds of major healthcare reform subsided.
- From a tax perspective it became less likely we would face a tax rollback/increase. With a Republican Senate, assuming this is what indeed ends up happening in the Georgia runoff, corporate tax hikes that would have reduced earnings are much less likely. Simply put, if taxes go up meaningfully on U.S. corporations, their earnings would go down by some margin. The risk of this happening to stocks is reduced so the stock market relaxed and then rallied as the election results poured in.
- Increased visibility and certainty. As you may already know, the market hates uncertainty. Once the analysts and pundits can see the landscape, estimates can be made and the market can start to function as it normally does. The election uncertainty had been weighing on sentiment, and many investors were using this as a reason not to shift into equities.
- Gridlock is good. Have you heard that gridlock historically more favorable for stocks? Well, the results going back to 1937 show this is indeed true.
- Going into the election, many investors were nervous and cautious about their investments. Once the outcome was known, there was a major repositioning and the unwinding of hedges put in place before the election. Those hedges were designed to protect in the event of sudden downside. With those probabilities removed, the hedges were removed, resulting in the market going up across a wide array of sectors.
- Hopes on Biden’s platform. The stock market and economy are already holding out hopes on what Biden will do for the economy. Some of those items include:
- Fiscal stimulus is likely to top the new administration’s agenda. Biden will probably seek more stimulus spending.
- Biden’s platform also earmarks $2 trillion in “accelerated” infrastructure spending, with a tilt to net-zero emission goals.
- Biden’s call to more than double the national minimum wage would be felt mostly by low-margin restaurants and retail.
- Improved trade certainty with international partners. Experts believe with Trump out of the way, the United States can reengage with foreign powers in a more traditional format and create better trade relations which historically has helped spur economic activity broadly across our economy.
- Biden’s victory sends a signal that it is unlikely to see a change in Federal Reserve easy money accommodations. Easy Fed means accommodative environment for stocks, thus, the market can rally.
It can be alarming to see how quickly the market can surge higher as soon as the election settled. By understanding the components of what went into the market rally, we hope market moves make more sense. Of course, the reality of the expectations as laid out above can create confusion, and potentially lead to market uncertainty. In the event that we start to witness one of the above events not materializing as expected, you should see the stock market starting to act and reprice accordingly. Chief among this list is the dividend government. If the Georgia runoff produces an unexpected outcome, and the Democrats end up controlling the White House, The House and the Senate, the stock market would need to reprice again, which will lead to an uncertain outcome. Stay tuned to the Senate results! There is a lot riding on the outcome of those races.
Feel free to contact your Henry+Horne Wealth Management adviser with any questions.
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