Why the election outcome might just be the herald of a new bull market.
After a fiercely fought-out election campaign, unlike almost no other in living history, Americans headed to the polls last week and have seemingly backed change.
While the official result has yet to be called, and the prospect of a drawn-out legal minefield awaits, we anticipate that the strength of the vote will carry Joe Biden to success as the 46th president of the United States.
At this stage, it looks as though the Republicans might just hold onto the Senate, with the balance of power hanging evenly ahead of two election run-offs in Georgia scheduled for January.
The result might leave some market pundits and investors with caution, with President Donald Trump overseeing all-time highs across the stock market.
However, the result bodes well as a positive outcome. In fact, the market’s upbeat response to the news exceeded our expectations, with the stock market delivering its best weekly result in more than six months last week.
We believe a large part of this can be attributed to two key factors.
Overarching catalysts for markets
First, the Democrats have signalled that they intend to spend significantly to help Americans get through the pandemic and recession.
One of the stumbling blocks in recent months has been the failure between Republicans and Democrats to come to an agreement to inject new stimulus into the economy. This level of spending stands to reason as a fundamental driver of the market.
Under a Biden presidency we expect that the government will have a greater mandate to push its cause, notwithstanding that it might not control the Senate come January.
With that said, Republicans were previously inching closer towards striking a deal with their counterparts, while some of the party’s more ‘moderate’ members may be within reach of crossing the aisle. Furthermore, Joe Biden has previously established a rapport in working both sides of the aisle across his career in politics.
Secondly, if the Senate does remain with the Republicans, which looks as though it could be the likely outcome, this would provide an important framework of checks and rigour with which the Democrat government would need to contend with.
This means that proposals to increase the corporate tax rate – something that would hit the profits of major US-listed companies – might not be a forgone conclusion. The same goes for a mandated minimum hourly wage, among other policy initiatives.
Charting the performance of a split Congress
History also tells us that US markets tend to rise after a close election, particularly running into this time of year, with the traditional Santa Rally still ahead.
Democrat presidents have also overseen the highest periods of performance across the market, averaging returns of 14.6% per annum since 1927 while in power, markedly higher than the 9.8% per annum under the control of Republicans.
On top of that, a split Congress – namely, Democrat president and Republican-controlled house or senate – has yielded the best results for investors. In this case, investors have seen returns of 16.4% per annum across the same timeframe.
There are some risks moving forward, primarily relating to the out-of-control pandemic crisis, and the next moves by incumbent President Donald Trump.
However, with economic growth picking up, unemployment falling at a rate of knots, hope for a potential COVID vaccine, and the ongoing commitment of the Federal Reserve to save the economy, the outlook for a new presidential agenda is somewhat positive. Markets could yet be at the beginning of the next bull run.