Even though President-elect Joe Biden may have (much) the right to boast from an early age, the post-election celebration of Wall Street is not just – or even primarily – about Biden’s victory. Instead, gains are being driven by a sense of relief because nightmare election scenarios have been averted and, perhaps most importantly, that vaccines will help end the pandemic.
“Certainly, there were many concerns before the election that this could lead to social and political unrest,” said Ed Yardeni, president of investment advisory firm Yardeni Research. “There were no riots on the streets. The market focused on the fact that the constitutional system still works ”.
Goldilocks for stocks
Investors are also relieved that neither party will have a free rein to impose comprehensive new policies in 2021. The “blue wave” did not materialize and Republicans unexpectedly won seats in the House of Representatives.
“All of this suggests that the most radical ideas, left or right, will not become law. This is being celebrated,” said Michael Arone, chief investment strategist at State Street Global Advisors.
For example, Democrats will have little chance of dramatically raising taxes on business or the wealthy. It is very likely that Biden’s comprehensive climate legislation will be blocked by Republicans. Only infrastructure has a chance to overcome the impasse.
“For investors, this is the best of both worlds,” said Arone of the election result. “You get a more predictable foreign and trade policy, while your domestic policy doesn’t seem as progressive as some of the worst fears.”
“It gave investors confidence that there is a light at the end of the tunnel,” said Arone.
That’s why Wall Street has largely looked beyond the Covid-19 cases, hospitalizations and deaths that have soared.
The Fed factor
Of course, the economic world is very different today than it was four years ago.
At that time, the recovery from the Great Recession was showing signs of aging. Investors believe that this recovery is just beginning – and they don’t want to lose market gains (especially if they lost it last time).
“The central question in 2016 was: how do you keep the recovery going?” said Nicholas Colas, co-founder of DataTrek Research. “The question now is what kind of recovery will there be from the worst recession since the Great Depression.”
This easy Fed policy scenario is essentially forcing investors to bet on stocks. And it is much more important to investors than politics.
“Whoever is sitting at the Resolute Desk does not matter to the markets,” said Colas. “What matters is politics.”
The big question now is whether this rally got out of hand.
“There are some red flags that suggest the market is a little overheated,” said State Street’s Arone. “I wouldn’t be surprised if you saw a 5% to 10% correction in the first quarter. That would be healthy.”
Yardeni also expects the market to cool.
“A correction would be a good way to keep the market going without a major collapse,” said Yardeni. “Melts, by definition and experience, are followed by breakdowns. They are fun to climb and painful to descend.”
In other words, Wall Street’s biggest concern at this stage of the pandemic is that things may be going a little too well.
It is yet another reminder of America’s K-shaped recovery and the total injustice of economic life in 2020.