An Election and Vaccines
A bitter election has ended. Some are jubilant, some are bitterly disappointed. Both candidates had avid followers, while others voted for what they might call “the lesser of two evils.”
As I’ve said in the past, I’m not a political pundit. My top priority is to be your financial advisor. Therefore, let’s cautiously review the recent contest through the eyes of a dispassionate investor who stays on the political sidelines.
Regardless of political preference, a big unknown has been removed. Ominous predictions of civil disruptions were not fulfilled and uncertainty has been replaced by a degree of certainty.
Figure 1 highlights S&P 500 Index3 performance broken down by the party that holds the White House and by Congressional makeup. For example, if Congress is divided and a Democrat is in the White House, the S&P 500 averaged a 15.9% annual return since 1950.
Note that markets have a long-term upward bias and typically move forward whether a Democrat or Republican has held the White House.
While two Georgia runoffs in January will determine which party captures the Senate, investors believe Republicans will probably prevail. This is being viewed favorably. Why? A united government under a Biden presidency would likely mean a big stimulus package, which would be viewed as a positive for investors. Yet, so far, a compromise on fiscal stimulus has been elusive, and investors have yet to express much displeasure.
On trade, it’s unlikely that we will fully return to pre-Trump policies, while a greater degree of stability and predictability on trade and tariffs is seen as beneficial to markets.
On taxes, investors have warmed to the prospect of gridlock and divided government, which would likely make passing significant tax increases and a big hike in the corporate tax rate more difficult.
Divided government would also reduce odds of more burdensome regulatory environment, though we may see new initiatives via executive orders.
Inoculating the economy
Stocks also received a strong jolt from the news that Pfizer (PFE $38) and Moderna (MRNA $152) have announced separate COVID-19 vaccines that are nearly 95% effective.
Dr. Scott Gottlieb, a former commissioner of the FDA and a member of Pfizer’s board of directors, said last month in a CNBC interview that with the vaccines “We could effectively end this pandemic in 2021.”
Despite the rise in Covid cases this fall and tighter restrictions around the nation, the major indexes had a stellar November, as investors looked past shorter-term challenges and focused instead on technological breakthroughs that may slow or end the pandemic.
Still, the short-term economic outlook is uncertain, and growth in economic activity has slowed from Q3’s record rebound. If a safe and effective vaccine encourages people to fly, enjoy vacations, return to restaurants, attend movies and theaters, and frequent sporting events, a significant roadblock to economic activity would be removed.
We have seen sharp increases in spending on goods and autos, according to U.S. Census data, but the same data also show that spending on businesses that require person-to-person interactions remains well below pre-Covid levels.
Stocks may still face bouts of volatility. With the major averages hitting new highs last month, any bit of disappointing news can encourage short-term traders to hit the sell button.
But tailwinds to stocks remain in place, including low interest rates, a very accommodative Federal Reserve, and the general belief that the economy will expand next year.
If you have any concerns, my door is always open. Please continue to adhere to social distancing and safety protocols, and please stay safe.
1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4 The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5 CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.
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