Mark U. from Reno, NV asks: Good morning Mitch, I’m curious to hear your thoughts on how the market will respond to legal challenges and/or an election result that could get dragged on for weeks or months. Thank you.
Mitch’s Response:
Thanks for writing, Mark. The stock market does not appear to be fazed by the ‘contested’ election, with the S&P 500 soaring +7.3% last week and jumping over +3% as I write my response to you (on Monday). In my view, the stock market is looking ahead to next year – it is not so much focused on the election matters of the moment.1
That being said, I agree with you that there will be a thin layer of uncertainty with legal challenges to the election result. But in all the reading I’ve done from legal experts examining the matter, it appears as though those challenges will not be robust enough to change the current result – and I think the market knows that.
What is the market looking ahead to? Gridlock, in my view. Looking at 46 years of data when power was split by party between the White House and Congress, we find that the S&P 500 delivered an average return of 7.26%. That’s pretty strong.
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Investors may be wagering, in my view, that a Republican-controlled Senate may prevent the Biden administration from implementing sweeping changes to the tax code, in particular raising corporate taxes by 7% (as proposed) and lifting the capital gains tax for high earners. At the same time, Wall Street may be anticipating more friendly engagement with allies, and a redoubled effort to fight the Covid-19 pandemic – assuming the plan does not involve economic lockdowns, which the Biden team has not indicated.
Technology and health care stocks have also been rallying, which to me is a sign that the market is anticipating softer regulatory efforts against big tech, with an administration also focused on spending more on health care, not less. Additionally, though a Republican-controlled Senate is likely to push back against massive fiscal stimulus favored by Democrats, it appears likely that a Biden administration would be more open to making a deal. Additional stimulus should provide tailwinds for the economy and for stocks.
As for the legal challenges we may anticipate for the next few weeks, it is difficult to imagine how the entire election would be upended by the courts, particularly given the evidence that has been presented so far. Of course, no outcome is assured, but often times investing is a matter of weighing probabilities. In this case, I think the probabilities are high that we already know the election result, and the market is pricing-in what the economy may look like a year from now.
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Disclosure