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The Market Reacts to the Election

As expected, this year’s presidential election results arrived later than usual. Uncertainty remained the day after—and the day after that.  But after the following weekend, former Vice President Joe Biden was widely acknowledged as the President-elect.  And it looks likely there will continue to be a split Congress.  The U.S. stock market jumped the day after the election—before there was a clear winner.  In fact, the S&P 500 Index had its best post-election day since 1952 (see the chart below).  With election uncertainty remaining, COVID-19 cases surging, and an economic recovery slowing, you can be forgiven for scratching your head a bit in seeing this response from investors.

The immediate market reaction bears some explaining: Strong market moves generally suggest the market has been surprised.  In this case, it seems investors had been pricing in a higher probability of Democrats winning a unified government – a so-called blue sweep.  Biden’s stated tax policies would hit corporate profits, and he has promised other far-ranging policy changes. Markets don’t typically relish dramatic change of any kind, so stocks were trading lower, reflecting the market’s collective view of the future.  But with the Republican Senate likely to remain a check on power, an aggressive Democratic legislative agenda is likely off the table. Thus, a split Congress is seen as a positive by Wall Street.  Part of the market’s reaction likely derived from this assessment.  Also, the worst fears of a contested election and serious legal challenges to the result have, so far, not come to pass.

We do not position portfolios around an election result or any single event.  There are too many other variables that impact investment returns.  In our analysis, we focus on the fundamentals and valuations that matter most long-term. And we construct portfolios to be resilient across a wide range of possible macro outcomes that could play out over the next few years, not days or weeks, regardless of the outcome of an election.

Over 30-plus years of managing money for clients, we have developed a healthy respect for the short-term unpredictability of financial markets.  We have much greater confidence in our long-term investment views and allocate our clients’ portfolios accordingly.

Over the next several months, the trajectory of the markets, the economy, and our society will remain highly dependent on the path of COVID-19 and our response to it.  But there have been positive developments just in the last week.  Strongly positive vaccine news was announced, giving a further boost to global stocks and economic forecasts.  And if political agreement can be obtained, an additional stimulus package could come before year-end and help individuals and the economy until COVID-19 is controlled.  Of course, there may also be surprises coming out of a lame-duck legislative session in the next two months.  As long-term investors, we always try to take a balanced view of the risks and opportunities.

We appreciate the trust our clients place in us, especially during these challenging times. We encourage you to reach us if you have questions about your portfolio or want to discuss recent market events.

Perritt Capital Management, Inc. is the registered investment advisor for Windgate Wealth Management accounts
All investments carry some level of risk, including the potential loss of principal invested.

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