By Jahnavi Joshi
The entire world let out a sign of relief as the results of the US presidential elections were finally announced on November 7th, with Joe Biden emerging as the winner. The only question now was whether investors shared the same sense of relief or if Trump’s bold statement about the “stock market crashing like never before, if he didn’t win” was going to occur.
History has shown that the “stock market’s presidential predictor” has a trustworthy track record. Since the second world war, when the S&P 500 has shown negative performance in three months before the presidential election in November, the outgoing president and the incumbent party has lost the race 88% of the time. Accordingly, when the S&P 500 moved positively during the same 3-month period before the election, the outgoing president and the incumbent party kept the office 82% of the time. The US stock market was not so decisive this year, with the S&P down by only 0.4%, giving Biden a razor-thin edge.
Based on the “presidential predictor”, Wall-Street was prepared and was excepting a blue wave, with Democrats winning the White House. According to Goldman Sachs, Biden’s win will bring good news to the market as it raises the probability of a stimulus of $2 trillion after the presidential inauguration in January. If Biden’s economic policies are implemented, it will create 7.4 million more jobs than Trump’s policies and it will bring the economy back to full employment by the second half of 2022.
Stock and bond prices went sharply higher, with the S&P 500 closing up by 2.2%, the day Biden was declared president. Investors were optimistic about the Democrats holding the white house while the Republicans maintained their grip on the Senate. They believe that with Biden in the White House there is going to be more stability with regards to trade policies, without having to worry about tax raises, health care reform and scrutiny of the power of giant technology companies, if Mitch McConnel remains firmly in control of the Senate.
News of the presidential election was shortly followed by Pfizer’s announcement of positive results from its early COVID-19 vaccine trials on November 9th had demonstrated 90% efficacy. As expected, this caused the S&P 500 to soar with investors rushing to buy stocks and money was poured into equity markets.
The S&P 500 increased by nearly 4% after trading opened on Wall Street and closed 1.2% higher, the highest gains were made by the energy sector which rose by more than 14%. Similarly, the Dow Jones industrial average jumped by nearly 3% because of a gain of 21% for American Express and a 14% gain for Boeing, while the Russell 2000 index also surged by 3.7%. Tech stocks led the charge with the highest growth, pushing the Nasdaq up by 3.85%
All in all, investors were heading into 2021 with high hopes of the Republicans winning the Senate seats in Georgia, keeping tax raises and a $1.9 trillion stimulus at bay. However, the first month of 2021 turned out the be quite tumultuous for the stock market between the Senate elections, unrest at the Capitol and GameStop.
January 2021 began with the Senate elections in Georgia, in which against all odds, the Democrats managed to bag a win, giving them control of the White House and the Senate House. US stocks and the dollar fell as investors mulled the Georgia results with the S&P 500 futures going down by around 0.36% and tech-heavy Nasdaq falling by 2%. 10-year S+YS Treasury yields, on the other hand, hit 1% for the first time since the start of the pandemic as investors moved to price in more stimulus under a Democratic Senate and presidency.
According to leading investment bank, Oppenheimer’s chief investment strategist, the surprise Democratic double win could lead to the S&P 500 falling by as much as 10% in the short-term. After which, he predicts that investors will get over the initial shock and will start taking advantage of the stimulus package which allocates $2,000 to a person and the infrastructure spending. In general, markets have always reacted well to stimulus packages as it boosts spending and helped business in the short-term. Analysts also believe that Biden’s first order of business once he’s in office will not be to raise taxes but another coronavirus relief bill, tax hikes could be delayed until the second quarter of 2022 giving the market enough time to recover from the downturn caused by COVID-19.
As a result of the economic uncertainty caused by the pandemic, the FED decided to leave the interests rates close to 0 and have continued to make huge bond purchases in an effort to keep the economic from dipping even lower.
Although unrelated to Biden’s presidential win, it is impossible to have an objective overview of the stock market without taking into account the GameStop frenzy which drove the value of the company up by $10 billion within a week but also caused S&P 500 and Dows-Jones to fall by around 2%, before they recovered because of restrictions placed on trading GameStop shares.
Overall, stock markets seesawed throughout January, moving up and down because of the spread of the coronavirus, vaccination effort and general news about US politics and economy. The Dow-Jones and the S&P both fell by around 2% and 1% respectively, it suffices to say it is going to be a very interesting year indeed.