Stocks are showing signs of relief after the election, but are investors ignoring potential risks?
The S&P 500 has rebounded 7.4% in four straight days of gains, including its biggest post-Election Day jump in at least 100 years.
The election was obviously a huge cloud over the market, and it’s breaking. But now’s not the time to be complacent. Investing requires keeping an eye on opportunities and risks, and we think there’s a little bit of both still out there.
A Sigh of Relief
The market pop over the past several days was driven by the increased likelihood of a split Congress, instead of one controlled by Democrats. Since 1944, the S&P 500 has been up an average of 8.6% in years when there was a split Congress, according to S&P Dow Jones data. Under this scenario, current policies may stay the same because it’ll be tougher for any new bills to pass through the House and Senate without opposition.
There’s also a smaller chance of regulatory pressure on tech and healthcare reforms. We may also see tax rates stay low, which could help keep company profits afloat and allow investors to keep more of their portfolio returns.
What’s being ignored?
Election Day has passed, but the drama is far from over. President Trump’s campaign has filed lawsuits related to ballot counts in several states. This legal move is being interpreted by some as a signal that he may not concede the election, if Biden is declared the winner, until these legal proceedings reach a final outcome. That means we may not have clarity on who the president is for some time.
We can’t say how these legal challenges will shake out, but any news that points to a drawn-out legal battle could roil the markets, especially after stocks’ strong climb this week.
Remember that big post-election rally we talked about? It’s happened mostly in the high-flying (growth) stocks, and less so in the slow-and-steady (value) stocks. The Russell 3000 Growth Index has jumped 9.2% this month, more than the 5.7% rise in the Russell 3000 Value Index. There have been a handful of periods this year that value stocks outpaced their growth counterparts, only for those leads to fade when uncertainty returned.
Value stocks should be poised for a comeback given the environment we’re in. The economy is recovering (albeit at a slower pace than earlier this year), an ideal setup for value.
History also shows growth’s strength is an unusual dynamic after Election Day. Value stocks have outperformed growth stocks in the last two months of every presidential election year since 1996 (the beginning of our data). Coincidentally, many of the recent presidential elections have overlapped with economic recoveries, like what we’re dealing with right now.
The Third COVID Wave
COVID cases have continued to surge, even though the market has been distracted by election headlines. Daily new COVID cases in the U.S. reached a new high in the past two days, exceeding 100,000, and regions around the world have recently imposed new lockdowns to stop the spread. While major lockdowns aren’t expected on this side of the pond, fears of increasing spread could weigh on economic data in the parts of the country where cases are rising. Though, similar to when cases where on the rise in the summer, investors seem to be counting on stimulus and vaccine support to offset this risk.
Fiscal Stimulus Squabbles
Fiscal stimulus, a key driver of market moves over the past several months, has also been forgotten as investors focus on the election. A split Congress, while good for the market, could mean more inaction on stimulus. This could backfire for the economy. We’ve already watched Congress disagree over another round of fiscal aid for U.S. businesses and individuals leading up to the election, despite a growing need for it in hard hit parts of the economy.
With different party leadership in the House and Senate, it looks like we could see even more squabbles drag out the process over the next few months. Even if a deal is passed, it may be smaller than expected.
What do you do now?
Neither the election stress, nor the market moves are likely over yet. When it all shakes out, we wouldn’t be surprised to see stocks higher at the end of this year. After all, we’re heading into the most wonderful time of the year for the market. November and December are typically the two best months for stocks, even in election years.
Do yourself a favor and don’t try to mix politics with your portfolio, even though it’s tough to escape the news these days. You’re invested for your goals, not a four-year election cycle.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo-advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.