Does it feel like 2021 yet?
The twists and turns so far make it seem like 2020 is dragging into a second season. As an American, I’m shocked and worried, and I’m wondering how political disagreements turned into excuses for violence. As a financial professional, I know that the politics, protests, and rioting in DC are just one factor affecting markets. I honestly don’t know what will happen over the next few weeks, but I can help you understand how it affects you as an investor.
Why did markets surge the day the Capitol was attacked?
While the world watched the violence in DC with horror, markets quietly rallied to new records the same day.1
That’s weird, right?
Well, not really. I think it boils down to a few things.
- Computers and algorithms are dispassionate, executing trades regardless of the larger world.
- Markets don't always react to short-term ugliness. Instead, they reflect expectations about economic and business growth plus a healthy dose of investor psychology.
- With elections officially at an end, political uncertainty has dissipated.
Overall, I think investors are looking past the immediate future and hoping that vaccines, increased economic stimulus, and economic growth paint a positive picture of the future.
The Democrats control the White House and Congress. What does that mean for investors?
If you’re like a lot of people, you might think that your party in power is good for markets and your party out of power is bad. That makes for a stressful experience every four years, right? Fortunately, that’s not the case at all. Markets are pretty rational with respect to politics and policy. While businesses and investors generally dislike increased taxes and corporate regulation, the Democrats hold such slim majorities in the House and Senate that it limits their ability to pass many big policy changes. Also, the Democrats’ immediate agenda is very likely to be focused on fighting the pandemic and passing more stimulus aid, both of which should support stock prices.
Does that mean markets will continue to rally?
No guarantees, unfortunately. With all the frothy market activity and rosy expectations about the future, bad news could knock stocks down a peg or two. A correction is definitely possible, and some strategists think certain sectors are in a bubble. Bottom line, expect more volatility.
Well, David Fontaine, CFP®, what comes next?
I wish I could tell you. I’m hoping that the vicious, divisive politics will come to an end after the inauguration, and the politicians can get back to work getting us through the pandemic. I’m optimistic that the light at the end of the tunnel is getting closer and we can start going back to normal. I’m proud of what scientists and medical professionals have been able to accomplish in such a short amount of time. I’m grateful for the folks around me. I'm hopeful about the future.