Even though President-Elect Joe Biden has a (very) early boast, Wall Street’s post-election celebration is not entirely – or even primarily – about Biden’s victory. Rather, both are being driven by a sense of relief that nightmare election scenarios were avoided and, perhaps most importantly, that vaccines will hopefully help end the epidemic.
“There were certainly a lot of concerns before the election that could lead to social and political unrest,” said the advisory firm, president of advisory firm Yardani Research. “There have been no riots on the streets. The market focused on the fact that the constitutional system still works.”
Goldilocks for shares
Investors are also relieved that neither party will have independent rule in 2021 to implement the new policies. The “Blue Wave” did not happen and Republicans unexpectedly gained seats in the House of Representatives.
Michael Arron, chief investment strategist at State Street Global Advisors, said, “All this suggests that more extreme views, to the left or to the right, will not become law. It is being observed.”
For example, Democrats would have very few shots to raise taxes on corporations or the rich. Republicans are likely to block Biden’s broader climate law. Only the infrastructure breaks through the gridlock.
“For investors, it’s to some extent the best of both worlds,” Aron said of the election result. “You get a more predictable foreign and trade policy, while your domestic policy does not seem as progressive as some of the worst apprehensions.”
Vaccines to protect
“It gave investors confidence that there is a light at the end of the tunnel,” Aron said.
This is the reason why Wall Street has largely seen the last skies of Kovid-19 cases, hospitalizations and deaths.
Of course, the economic world today is very different than it was four years ago.
Subsequently, recovering from the Great Recession, signs of aging were visible. Investors believe that this recovery is just beginning – and they do not want to miss out on gaining in the market (especially if last time).
“The central question in 2016 was: How do you continue recovery?” Said Nicholas Colas, co-founder of Datatrack Research. “Now the question is what kind of recovery from the worst recession after the Great Depression will be.”
The backdrop of easy Fed policy is essentially forcing investors to place bets on stocks. And this is far more important for investors than politics.
“Whoever sits at the Resolute Desk doesn’t matter,” said Collaz. “What matters is policy.”
The big question now is whether this rally has gone out of hand.
“There are some red flags that suggest warming the market,” said Aaron of State Street. “I wouldn’t be surprised if you saw a 5% to 10% improvement in the first quarter. It would be healthy.”
Yardeni is also hoping that the market will cool down.
“A correction is a good way to keep the bull market on track without a major recession,” Yardney said. “Melt-ups are, by definition and experience, followed by meltdowns. They are fun and painful along the way.”
In other words, the biggest concern at this stage of Wall Street’s epidemic is that things may be a little too good.
This is yet another reminder of America’s K-shaped recovery and the harsh unfairness of economic life in 2020.