The Market Whipsaw

Most of my clients receive emails every weekend updating them on how their portfolios performed during the week. While this can sometimes seem like too much information, I’ve always felt it’s better to know, for better or worse, how things are going. The week heading into Election Day was pretty rough for markets and, as I understand it, was one of the worst pre-Election weeks on record. But markets have been so on-again-off-again volatile in recent years it seems fitting that last week turned out to be one of the best General Election weeks ever. Go figure. But why did this happen? How could markets move so rapidly from feeling gloomy to ebullient?

To answer these questions I will again lean on my partners at Bespoke Investment Group. This is one of those times when I couldn’t have explained any better myself, so here you go.

As votes now stand, Republicans will hold 50 Senate seats in the next session of Congress while Democrats will hold 48. The two remaining seats are both up in the air in Georgia because none of the candidates in those two races received more than 50% of the vote. This triggers an automatic run-off with voting set for early January. If Republicans end up winning one of those two run-offs, they will hold the Senate and offer a significant check on a presumed President Biden and the Democratic House. At this point, we would expect Republicans to indeed hold onto at least one of those GA Senate seats and likely two, but obviously it’s far from a done deal and anything can happen.

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The reason for getting a bit into the weeds on this is because of the stock market’s reaction to this week’s election results. Coming into the election, we presumed the market had priced in Biden as a favorite with Trump also having a decent chance to win. We also presumed that the market had priced in pretty high odds that a Dem sweep would occur should Biden prevail. The prospect of a Biden victory and a GOP Senate was likely not priced in much, which is partially why we’ve seen equity prices soar ever since the closing bell on Election Day.

There could be any number of reasons why the stock market has reacted the way it has since Election Day, but generally speaking, below are some of the reasons to be bullish if we have a Biden victory plus a GOP Senate:

1) No Dem sweep likely means no big tax hikes or rollback of the GOP tax cuts at least for the next two years when the 2022 mid-terms occur. Prior to the election, investors were worried that a Dem sweep would mean a significant capital gains tax hike to go along with any number of tax hikes on income or corporations.

2) No more trade wars. Regardless of your thoughts on the US/China trade partnership, this is one area where President Trump’s stance acted as a headwind to the global equity market.

3) Less of a leftward tilt when it comes to the regulatory environment, Biden’s cabinet, the Supreme Court, Green New Deal, etc. The GOP holding the Senate prevents sweeping reforms that are typically viewed as bearish for the market.

4) Less of a chance that “Mega-Cap Tech” gets hurt. Both Democrats and Republicans are mad at Big Tech for different reasons, and because neither side has full power to get its way on this issue, it’s more likely that nothing gets done at all.

Again, there are dozens and dozens of additional theories for why the market would like or dislike a President Biden with a split Congress, but the ones above are the ones we think had the most impact on driving equity prices higher since Tuesday. When it comes to COVID, we think it’s a wash but we also think the market is more and more looking past the virus with a vaccine on the horizon and better understanding that case count headlines aren’t the be-all end-all.

Have questions? Ask me. I can help.

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