The Biden era is off to a roaring start on Wall Street, even surpassing the euphoria following President Donald Trump’s upset victory in 2016.
The S&P 500 has surged 10% since Election Day to all-time highs. That nearly doubles the 5.5% rally during the same post-election period in 2016.
Those are impressive returns, especially considering Trump repeatedly warned stocks would “crash” if Americans failed to reelect him. That has hardly been the case, at least so far.
Even though President-elect Joe Biden might have (very) early bragging rights, Wall Street’s post-election celebration is not solely – or even primarily – about Biden’s victory. Instead, the gains are being driven both by a sense of relief that nightmare election scenarios were avoided and, perhaps most importantly, that vaccines will hopefully help end the pandemic.
“Certainly, there were a lot of concerns prior to the election that it could lead to social and political unrest,” said Ed Yardeni, president of investment advisory firm Yardeni Research. “There have been no riots in 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 free reign to impose sweeping new policies in 2021. The “blue wave” didn’t materialize and Republicans unexpectedly gained seats in the House of Representatives.
Unless Democrats sweep both January runoffs in Georgia, the GOP will retain control of the Senate. Even if Democrats win those Georgia races, they will hardly have a supermajority, although with a 50/50 split, Vice President-elect Kamala Harris would cast the deciding vote to break any deadlocks.
“All of this suggests that the more extreme ideas, on the left or the right, won’t become law. That’s being celebrated,” said Michael Arone, chief investment strategist at State Street Global Advisors.
For instance, Democrats will have little shot at sharply raising taxes on corporations or the wealthy. Biden’s sweeping climate legislation is very likely to be blocked by Republicans. Only infrastructure stands a chance of breaking through the gridlock.
Trump bashed Biden during the campaign as “Sleepy Joe,” but many investors wouldn’t mind a break from the chaos and unpredictability of the Trump era. The latest example occurred Tuesday night when Trump shocked even his allies by threatening to block the bipartisan $900 billion relief package.
“For investors, this is somewhat the best of both worlds,” Arone said of the election outcome. “You get a more predictable foreign and trade policy while your domestic policy doesn’t seem as progressive as some of the worst fears.”
Vaccines to the rescue
The post-election rally kicked into high gear after Pfizer (PFE) and BioNTech (BNTX) announced November 9 that their vaccine is highly effective against Covid-19. Moderna (MRNA) followed suit with a similar announcement a week later. Both vaccines have since received emergency-use authorization from the FDA.
“It gave investors confidence that there is a light at the end of the tunnel,” Arone said.
That’s why Wall Street has largely looked past skyrocketing Covid-19 cases, hospitalizations and deaths.
Not all markets are outpacing their post-election performance of 2016. For instance, the Dow’s 10% leap since Election Day is only narrowly ahead of its 9% gain during the same period of 2016.
The Fed factor
Of course, the economic world is very different today than it was four years ago.
Back then, the recovery from the Great Recession was showing signs of old age. Investors believe this recovery is just getting started – and they don’t want to miss out on the market gains (especially if they did 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.”
And unlike in 2016, the Federal Reserve is not itching to lift interest rates out of the basement anytime soon. In June, Fed Chairman Jerome Powell said: “We’re not even thinking about thinking about raising rates.”
More recently, the Fed promised to keep its foot on the stimulus pedal. At its December meeting, the central bank pledged to keep buying bonds “by at least” the same pace until more progress is made in repairing the economy.
That backdrop of easy Fed policy is essentially forcing investors to bet on stocks. And it’s far more important to investors than politics.
“Whoever is sitting at the Resolute Desk doesn’t matter to markets,” Colas said. “What matters is policy.”
The bigger question now is whether this rally has gotten out of hand.
Not only are stocks booming, but the IPO market is also red-hot, as evidenced by the monstrous debuts of DoorDash and Airbnb. Investors are plowing money into blank-check companies known as SPACs. And the M&A market is gaining steam.
“There are some red flags to suggest the market is a bit overheated,” said State Street’s Arone. “It wouldn’t surprise me if you saw a 5% to 10% correction in the first quarter. That would be healthy.”
Yardeni is also hoping the market cools off.
“A correction would be a good way to keep the bull market on track without a major meltdown,” said Yardeni. “Melt-ups, by definition and by experience, are followed by meltdowns. They’re fun on the way up and painful on the way down.”
In other words, Wall Street’s biggest worry at this stage of the pandemic is that things might be going a bit too well.
By contrast, Main Street is struggling just to get by – and hoping Washington comes to the rescue with more aid.
It’s yet another reminder of America’s K-shaped recovery and the stark unfairness of economic life in 2020.