The S&P 500 has jumped 10% since polling day to all-time highs. This almost doubles the rally of 5.5% in the same post-election period in 2016.
The Nasdaq, driven by high-flying technological stocks including Amazone ( and )Zoom (, is up 15% since November 3. This almost triples the 5% post-election Nasdaq hike from four years ago. )
These are impressive returns, especially since Trump has repeatedly warned that stocks “will collapse” if Americans do not re-elect him. This has hardly been the case, at least so far.
Even though President-elect Joe Biden may have bragging rights (very) early on, Wall Street’s post-election celebration isn’t just – or even primarily – about Biden’s victory. Instead, the gains are driven both by a sense of relief that nightmarish election scenarios have been avoided and, perhaps more importantly, that vaccines will hopefully help end the pandemic.
Goldilocks for stocks
Investors are also relieved that neither party will have free rein to impose sweeping new policies in 2021. The “blue wave” has not materialized and Republicans have unexpectedly won seats in the House of Representatives .
Unless Democrats sweep away January’s two rounds in Georgia, the GOP will retain control of the Senate. Even if the Democrats win those races in Georgia, they will hardly have a supermajority, although with a 50/50 split, Vice President-elect Kamala Harris would vote to break the deadlock.
“All of this suggests that the most extreme ideas, left or right, will not become law. It’s celebrated, ”said Michael Arone, chief investment strategist at State Street Global Advisors.
For example, Democrats will hardly stand a chance of raising taxes on corporations or the wealthy. Biden’s radical climate legislation will most likely be blocked by Republicans. Only infrastructure has a chance to break the deadlock.
Trump criticized Biden during the campaign for calling him “Sleepy Joe,” but many investors would not be afraid to break away from the chaos and unpredictability of the Trump era. The latest example came on Tuesday night when Trump shocked even his allies by threatening to block the bipartisan $ 900 billion relief plan.
“For investors, it’s kind of the best of both worlds,” Arone said of the election result. “You get a more predictable foreign and trade policy when your domestic policy doesn’t seem as progressive as some of the worst fears. ”
Vaccines to the rescue
The post-election rally moved into high gear after Pfizer ( and )BioNTech ( announced on November 9 that its vaccine is very effective against Covid-19. )Modern ( followed suit with a similar announcement a week later. Both vaccines have since received emergency use clearance from the FDA. )
“It gave investors the assurance that there is a light at the end of the tunnel,” Arone said.
That’s why Wall Street has far surpassed the skyrocketing Covid-19 cases, hospitalizations and deaths.
Not all markets outperform their post-election 2016 performance. For example, the Dow Jones’ 10% jump since election day is only slightly ahead of its 9% gain over the same period from 2016.
The Fed factor
Of course, the economic world is very different today than it was four years ago.
At the time, the resumption of the Great Recession was showing signs of age. Investors think this recovery is just beginning – and they don’t want to miss out on market gains (especially if they did so last time around).
“The central question in 2016 was: how to maintain the recovery? Said Nicholas Colas, co-founder of DataTrek Research. “The question now is what kind of recovery there will be after the worst recession since the Great Depression. ”
And unlike 2016, the Federal Reserve isn’t looking forward to raising basement interest rates anytime soon. In June, Fed Chairman Jerome Powell said, “We’re not even thinking about a rate hike.”
More recently, the Fed promised to keep its foot on the stimulus. At its December meeting, the central bank pledged to continue buying bonds “at least” at the same rate until more progress is made in repairing the economy.
This backdrop of easy Fed policy essentially forces investors to bet on stocks. And that’s much more important to investors than politics.
“Whoever sits at the Resolute Desk doesn’t matter to the markets,” Colas said. “What matters is politics. ”
Melt away fears
The bigger question now is whether this rally has gotten out of hand.
Not only are stocks booming, but the IPO market is also hot, as evidenced by the monstrous beginnings of DoorDash and Airbnb. Investors invest money in blank check companies called SPAC. And the mergers and acquisitions market is growing.
“There are red flags to suggest the market is a little overheated,” State Street’s Arone said. “It wouldn’t surprise me if you saw a 5% to 10% correction in the first quarter. It would be healthy. ”
Yardeni also hopes the market cools down.
“A correction would be a good way to keep the bull market on track without a major collapse,” Yardeni said. “Melt-ups, by definition and by experience, are followed by collapses. They are fun on the way up and painful on the way down. ”
In other words, Wall Street’s biggest worry at this point in the pandemic is that things may be going a little too well.
In contrast, Main Street is struggling to cope – and is hoping Washington will come to the rescue with more help.
It’s yet another reminder of America’s K-shaped recovery and the glaring unfairness of economic life in 2020.