November 09, 2020
There are just eight weeks until the new year begins. The Zen masters say focus attention on the present moment, but I am increasingly focused on the new year that lies just ahead. And this past election week has gone a long way toward providing more visibility on the lay of the land just over the horizon. Whether the results have brought you joy or despair, I hope there is some good news in the results for most everyone.
In the weeks and months prior to the election I closely followed Stocks for the Long Run author, and Wharton Finance Professor, Jeremy Siegel. He hosts periodic calls with finance folks in addition to his regular appearances on SiriusXM and CNBC. Leading up to the election Professor Siegel was analyzing the likely impact on financial markets of various election outcomes. The most likely scenario at that time was a Biden victory with the Democrats gaining very narrow control of the Senate and picking up a few seats in the House. The scenario seen as most favorable for the financial markets, however, was a Biden victory with Republicans retaining control of the Senate. This latter scenario now appears increasingly more likely. Here are some of the reasons that the market prefers that scenario:
- A Biden administration is expected to be more consistent and predictable. Markets do not like surprises and uncertainty.
- Republican control of the Senate provides a check on executive power and means change is likely to be more measured and incremental. Big tax hikes are less likely, yet additional fiscal stimulus remains quite possible. Both parties want increased infrastructure spending, for example.
- Biden and McConnell have a track record of cutting deals, and the two may be able to negotiate more effectively than McConnell and Trump.
- Trade War policies are expected to be less of a headwind for global financial markets going forward.
- The regulatory environment is expected to tighten less than would have been expected under a ‘blue wave’ scenario. This is generally perceived to be supportive of equities.
Regardless of how we may feel about the politics, the markets seem to be in favor of the outcome, at least for now. The S&P 500 advanced more than 5% during election week and markets are up sharply to start this week on favorable vaccine news.
As Professor Sigel has pointed out, there have been 57 bear markets in the history of the stock market, where, each time, the market has gone on to make new highs and recover all the bear market losses. Nothing here should suggest that markets won’t be volatile going forward. Of course, there will be sell-offs and recoveries. Some may be quite violent. That is how markets have always behaved. The main point is this: over longer horizons, strategic equity exposure has been quite favorable to investors.
Whatever our personal views, the markets seem to approve of the election results.