After experiencing the roller coaster of 2020, we need not remind you that nothing with respect to markets, or politics, is certain. With that qualification, it appears that we will have a new President in January. After a volatile September and October, during which the S&P 500 fell by 4% and 3%, respectively, U.S. stocks have risen by 7% in the past four days.* From observing these returns and how the overnight futures market reacted to various state election results, it’s clear that the market is reacting favorably to the election news.
The main force driving markets is anticipated corporate profits. While earnings are impacted by the health of the economy, there is far from a one-to-one correlation between profits and any series of economic indicators. It would be a mistake to extrapolate the stock price reaction this week to any prediction of long-term unemployment rates or GDP growth. Regardless, no investor is unhappy about being 7% wealthier.
Near-Term Outlook for Stocks
Corporate earnings for the 3rd quarter have grown by 31% from the previous quarter, after having risen by 37% in the 2nd quarter. Positive earnings growth is expected by security analysts to continue throughout 2021.** While we will likely not see pre-pandemic levels of profits until late next year, the recovery for corporate earnings is on its way.
We warned in early September of the increasing volatility that now has occurred over the past two months. Except for the election, the factors that led to our warning are still present –the biggest factor being the new wave of Covid cases. While we might see some reduction of volatility of stock prices, you should expect to continue to see some large market fluctuations.
And in the Long-Term
In the long-term, stock markets tend to rise – the economy grows, profits grow, so stock prices grow. And given the alternative to stocks is either low yielding bonds, or lower yielding cash, having a reasonable portion of your portfolio allocated to stocks is a wise decision.
I’ve been in the investment business for, gulp, nearly 40 years, so this is the 10th presidential election in which I’ve been asked about whether one political party has been better for the stock market. Many are surprised by the answer. We have data going back to the Hoover administration.
Under Republican Presidents, stocks have earned an annual return of 7.6%, while under Democratic Presidents, stocks have earned an annual return of 14.5%. This is far from proof that Democrats are good for the stock market – there are many factors that impact values – but the 92 years of data definitely do not suggest that they are bad for your portfolio.***
* Source of returns is Morningstar, Inc., and Yahoo Finance. Past performance is not indicative of future results.
** Source: S&P Dow Jones Indices
*** Source of returns is Morningstar, Inc. Calculations were done by Savant Investment Group, LLC. Past performance is not indicative of future results.