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 a little shocked and worried, and I’m musing onhow political disagreements turned into excuses for violence for both sides of the red-blue spectrum.
As a father, I am concerned about the type of world my kids will have to grow up in.
As a financial professional, I know that the politics, protests, and rioting in DC are just one small 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 rioted?
While the world watched the craziness in DC with popcorn, 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 based on the biases programmed in, 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 reduced some.
Personally, I disagree with much of the implementation of the lockdowns, not protecting the vulnerable, shutting down small businesses, and how the economic stimulus bills have been approached.
But it’s not about my viewpoint, it’s about what the whole market thinks. I think most 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 for our markets. Market are pretty rational and efficient in the long term, especially with respect to politics and government 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?
Maybe; 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 several sectors are in a bubble.
Bottom line, expect more volatility.
Well what comes next?
I wish I could tell you. If somebody tells you they know, then they need a dose of humility or wisdom.
I’m HOPING that the vicious cycle of divisive politics will slow down some after the inauguration, and the politicians can get something done. But, they are usually disappointing, even when it is bipartisan.
I am optimistic that the light at the end of the tunnel is getting closer, and we can start getting a little bit closer 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 still rationally optimistic, and hopeful about the future. Human innovation is the ultimate resource and we are making great progress in science, medicine, technology, etc and it all makes the world a better place.
How about you? What’s your take? I’m interested to hear your thoughts.
Email me your thoughts at [email protected]
P.S. Tax laws are likely to change under the Biden presidency. We don’t know exactly when they’ll happen or what they’ll look like, but I’ll be in touch when we know more. We will be releasing an Insights guide to the major tax changes.