LupuFinancial
Overseeing the financial affairs of individuals, families, and small business owners.
___________________________________________________________
Post-Election Market Update
What a year 2020 has been, and we still have six more weeks remaining. The election came and went, and following along with the already strange theme of 2020 “The Year of Covid,” the election was just as strange. While all of the polls heading into election day had Biden leading and looking like it was going to be a Democratic majority sweep, along with increasing cases of Covid, led to a bit of a panic sell off in the markets.
After the election, however, the script was flipped. On the days following the election the stock markets started taking off for its biggest weekly gains in eight months, climbing almost ten percent. The markets had a big rebound, despite the highly suspect election results, accusations of fraud, states that still had yet to finish counting their votes because it was still too close to call and still votes were trickling in.
With all of that uncertainty, why on earth did the stock market continue to rally?
Here is a current weekly chart of the S&P 500, this reflects all the losses from the March selloff from Corona Virus have been recaptured back to all-time highs.
If you are like me, you may have been wondering, how on earth is it possible for the stock market to bounce back to all-time highs when the real world, especially in California, is partially shutdown, friends and family still out of work or working from home, churches shut down, election uncertainty, allegations of fraud, and rising new cases of COVID-19????
Great question….
The reasons the stock market has been so resilient and does not seem to care no matter what the news event comes down to four basic reasons:
1)Don’t Fight The Fed:
First and foremost, whomever is in power one thing has been made clear since the 2008 housing crisis; that is the fed has our back. What that means is for better or for worse, the feds are ready willing and have been stepping in, anytime things get bad, to print money, keep rates low, and buy assets to prop up the economy and the stock market. This will not be changing anytime soon, or ever, at least not in the midst of this pandemic.
2)A Divided Government:
Whichever side you sit on, Democrat or Republican, conservative or liberal, one thing is clear, the stock market loves and divided government. The things that the stock market hates the most is uncertainty and radical change. The market sold off before the election because all the polls and the media had not only Biden leading by a big margin, it also was thought that the Democrats would win back the Senate and there would be a blue wave of policies coming with Biden raising taxes, printing more money for ObamaCare, and the big Green New Deal for alternative energy. Having one party rule even if it is on your parties side, is never a good thing. This is why the market didn’t care if it was Biden or Trump, once it became clear that the Dems would hold the house, and it looked like the Republicans would hold the majority of the Senate, the market took off. This means that both parties will now have to work together across party aisles to get anything done, and that nothing radical will get past. This is the opposite of uncertainty for the market, it is “the status quo.” With the feds having our backs, the markets are off to the highs again, despite what actually is happening in the real economy.
3)Potential Vaccine:
This past week there was news from Pfizer that it now has a Covid vaccine that is 90% effective. Although Pfizer admits it will be months before the vaccine will be made available, in a society of pill popping, quick and easy fix, this was great news and optimism that if Covid is here to stay we have the magic vaccine that will ease most people’s concerns.
4)Cheap Money:
The last factor for why the market continues to go higher, is the same reason as #1 above, and the same reason the market has been only going up overall since the housing smackdown. Long gone are the days when grandma and grandpa could retire from their company with a nice pension, then could put their savings in a nice and safe certificate of deposit that would pay them 6-8% per year. When you have savings and CDs that pay less than 1%, it now forces grandma and grandpa to put their life savings into dividend paying stocks, they are forced to accept more risk and volatility in the stock market to try to not outlive their money.
With all of that said, we can expect to have business as usually as Washington will be in a stalemate until we do all of this again in two years for the midterm elections.
However, just to play devil’s advocate. What are some risks going forward that could change things:
1)If the Georgia Senator election runoff happens to swing in favor of the democrats, and they gain full control of Washington, then all bets are off and we are back to radical change, the thing the market hates most.
2)As we have rising cases of Corona Virus as we head into flu season, should case rise, deaths rise, and hospitals become overwhelmed, then we could all be back on lockdown and see another massive panic selloff in the market and would be challenging to say the least for the global economy.
3)With Trump contesting the election and alleging fraud, should we start to see battles in courts and states electoral college get overturned, this could lead to much civil unrest around the nation, which in turn could get ugly fast and lead to a market selloff.
While none of these three scenarios seem likely, they are possible, especially in the year of 2020, that I think I can speak for all of us when I say, when is this year going to end???