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.
“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.
“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
“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.
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.”
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.”
Melt-up fears
The bigger question now is whether this rally has gotten out of hand.
“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.
It’s yet another reminder of America’s K-shaped recovery and the stark unfairness of economic life in 2020.
