GUEST BLOG / By Craig Fehr, a CFA with Edward Jones Company points out having now closed the book on a year that contained a global pandemic, a presidential election, a historic recession, an unprecedented bear market, and an equally unprecedented market rebound, the logical question for investors on January 11, 2021 is: What happens after elections?
"Broadly, the market has done well in the year after a presidential election, posting an average return of 10.2%1. When a Democratic president took office following a Republican White House, the average stock market return in the following year was 14.1%
"When an election produced the same political party in control of the White House and Congress, the average return the next year was 11.8%.
"When it was the Democratic party in control, the market returned 13.7%.
Bottom line: "The outcome of the Georgia runoff elections this week produced a 50/50 split between Republican and Democratic Senate seats, resulting in Democratic control across the White House and Congress," Fehr reports.
Edward Jones believes this clears some hurdles for the new administration as it pursues its agenda, which includes a higher corporate tax rate and increased taxes on high earners.
"While corporate tax hikes would put a dent in upcoming earnings growth, we don't believe it's a foregone conclusion that this will occur immediately. We suspect the new administration will be somewhat sensitive to the fragility of the current pandemic economy, which could delay any such changes.
"Moreover, we still expect some gridlock in Washington, which should limit sweeping, unimpeded legislation relative to the proposals outlined during the campaign. Instead, we expect the Biden administration will most immediately focus on fiscal stimulus in the form of increased aid for households and increased government spending this year (including a potential infrastructure bill).
"While this will add to the government debt tab, it will also offer a boost to the economy this year. Though political uncertainties and deep partisan divisions have found their way back into the spotlight, thus raising the tendency to view the markets through a political lens, investors should not lose sight of the fact that history shows that market performance over time is dictated by economic growth, rising corporate profits, and favorable monetary policy – all of which we think can remain firmly in place for the next several years.
"When it comes to the performance of the financial markets, we don't think political unrest or the outcome of the election will inhibit the economy's ability to grow, quality corporations' ability to increase profits and dividends, or the Fed's willingness to maintain significant stimulus.
"It's worth remembering that there were heightened concerns about the outcome for the market heading into the presidential election, yet stocks have gained 16% since the start of November, which we attribute to an improving fundamental outlook, not a partisan vote by the stock market.