One never knows why the market rises or falls on a given day. There could be many reasons, or none at all.
Last week The Wall Street Journal told us the market was rallying because investors expected a blue wave (Democrat president and Democrat congress), implying that it would lead to a big stimulus package. Later that week the Fox News website noted that stocks were rallying because there wouldn’t be a blue wave, which would make progressive changes more unlikely. What does the rally mean to me? It’s a bull market.
I have always said that ordinary people care about politics more than investors do. Historically, the market rises after an incumbent president is re-elected. The market also rises when the incumbent loses.
When Donald Trump was elected, some saw that as a buying opportunity for oil and steel stocks and a selling opportunity for solar. But during his four years oil and steel stocks badly lagged and solar increased close to 300%. I’ll ignore “Biden stock” recommendations.
According to Charles Schwab, the best performance has historically come when a Democrat was president with a split congress (such as what we’ll likely have starting in January). There is a caveat, however. That has rarely happened (Obama and Clinton). That’s not much history, but the DOW gained 10.4% annually during that time. It shouldn’t be much different with a Biden presidency and a split congress. In both cases, the Fed will keep short-term rates very low, at least until the economy perks up.
Still, policy matters. Stock prices are ultimately linked to corporate earnings, not political factors, specifically to after-tax corporate earnings. If corporate taxes increase profits would suffer and there would be less to pay as dividends to stockholders. That would not be good for stocks.
More massive spending next year, seen by investors as good, may be less likely if the senate is in GOP hands. Such spending would be a temporary boost but could ultimately lead to upward pressure on inflation and interest rates.
Third-quarter earnings have been far better than expected for more than 75% of S&P 500 companies and the economy is bouncing back stronger than most thought as well. Pfizer said their vaccine is 90% effective, far better than expected. The light is showing at the end of the tunnel and there are better days ahead for the economy and for our health. The market agrees.
David Vomund is an Incline Village-based Independent Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.