While President-elect Joe Biden might have bragging rights (very) early, the post-election Wall Street celebration is not just – or even primarily – about Biden’s victory. Instead, the profit is driven by both a sense of relief that nightmare election scenarios were avoided and, perhaps more importantly, that vaccines will hopefully help end the pandemic.
“Certainly, there were many concerns ahead of the election that this could lead to social and political unrest,” said Ed Yardeni, president of investment consultancy Yardeni Research. “There are no riots in the streets. The market focused on the fact that the constitutional system is still working.”
Goldilocks for stocks
Investors are also relieved that neither side will have free rein to impose sweeping new policies in 2021. The “blue wave” did not materialize and Republicans unexpectedly won seats in the House of Representatives.
“All of this suggests that the more extreme ideas, left or right, will not become law. That is being celebrated,” said Michael Arone, chief investment strategist at State Street Global Advisors.
Democrats, for example, will have little chance of sharply increasing taxes on corporations or the rich. Biden’s sweeping climate legislation is most likely being blocked by Republicans. Only infrastructure has a chance to break the deadlock.
“For investors, this is more or less the best of both worlds,” Arone said of the election results. “You get a more predictable foreign and trade policy, while your domestic policies don’t seem as progressive as some of the worst fears.”
Vaccines to the rescue
“It gave investors confidence that there is light at the end of the tunnel,” said Arone.
That’s why Wall Street has largely looked past the sky-high Covid-19 cases, hospitalizations, and deaths.
The Fed factor
Of course, the economic world today is very different from four years ago.
At the time, the recovery from the Great Recession was showing signs of aging. Investors think this recovery has only just begun – and they don’t want to miss out on 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 there will be from the worst recession since the Great Depression.”
That background of simple Fed policies essentially forces investors to bet on stocks. And it is much more important to investors than politics.
“Who is at the Resolute Desk doesn’t matter to the markets,” said Colas. “It’s about policy.”
Melting fears
The bigger question now is whether this rally has gotten out of hand.
“There are some red flags that indicate the market is a little overheated,” said State Street’s Arone. “I wouldn’t be surprised if you saw a 5% to 10% correction in the first quarter. That would be healthy.”
Yardeni also hopes the market will cool.
“A correction would be a good way to keep the bull market on track without a major meltdown,” said Yardeni. “Melt-ups are by definition and experience followed by meltdowns. They’re fun on the way up and painful on the way down.”
In other words, Wall Street’s main concern at this stage of the pandemic is that things may be going a little too well.
It’s another reminder of America’s K-shaped recovery and the grim dishonesty of economic life in 2020.