As 2020 election results have come in throughout this week, one thing that wasn’t expected is the market rally that has occurred. While this has happened for several reasons, it’s helped to remind us why it’s so important to remain diversified and have a long-term financial plan.
This week’s market rally
Despite record COVID-19 cases, and this week’s hotly contested presidential election, the S&P 500 rallied 7.4% through Thursday’s close, recouping last week’s COVID-inspired losses. Contrary to public sentiment, market volatility declined 33% for the week as the market rallied.1 Given record numbers of new COVID cases and the yet-to-be called presidential election, how can this be?
Today’s market values three things
The market cares less about which political party wins the White House and more about these three things:
- A peaceful transfer of power. Above all else, the market values a peaceful transfer of power as this is the bedrock of American democracy. This week’s election has been largely peaceful and effective, despite political tensions and the many new challenges posed to state and county election administrators by the pandemic. Further, the market hates uncertainty but now has greater insight into who will (likely) be president come January, and that’s more than it knew last week. Finally, we have strong and time-tested constitutional mechanisms for adjudicating any disputes. Markets know and value this, and in response market volatility significantly declined this week and stock prices rose.
- Policy stability. The market values policy stability, especially with respect to taxation and business regulations. The likelihood of major policy changes, e.g., higher taxes or new anti-trust legislation focused on certain technology companies, would naturally force markets to reprice assets. But major policy changes are less likely now than they were last week. Coming into the election, markets arguably priced in a “blue wave” and with it higher taxes and increased regulations. Given the results, this may not come to fruition. While former vice president Joe Biden appears to have won the White House, Democrats, having retained their majority in the House, lost seats and are unlikely to win control of the Senate. With divided government, the likelihood of major tax or regulatory changes is exceptionally small—any major legislation will require significant compromise to make it out of Congress and to the president’s desk and the market knows this. So, with higher taxes and tougher regulations likely off the table, stocks rose in response.
- Economic stimulus. Today’s market wants to see additional economic stimulus to help Americans combat the economic challenges presented by the coronavirus pandemic, as such a stimulus would be good for consumers and business. With the election soon behind us, the prospect of reaching bipartisan agreement on another COVID-relief package has increased. Senate Majority Leader Mitch McConnell communicated this week that reaching an agreement on a new package is the Senate’s top priority between now and year end.
Advice for investors
Our advice to investors remains the same as it has been throughout this year – stay the course. Stay diversified, remain focused on your long-term goals, and reach out to your advisor if you have questions or want to adjust your plan.
- The future is unknowable, which is why you’re diversified. It’s also why we strongly advise against market timing. The future is always unknowable and diversifying across and within asset classes is the best defense against the unknown. The cash and bond components of your portfolio act as ballast against equity market volatility and equities provide the growth engine your portfolio needs to build wealth and outperform inflation over time.
- Stick with your plan. You and your advisor have worked hard to determine the right asset allocation needed to achieve your long-term goals—stick with it. After all, you’re not investing for the next two months, you’re investing for the next twenty years. If you still have concerns or questions, reach out to your advisor so together you can determine if any adjustments need to be made.
- We’re here to help. We understand you may have questions and concerns about the election’s outcome and its potential impact on markets, your portfolio, and your goals. It’s important that you feel confident in your financial plan. That’s why we encourage you to call any time to discuss your financial plan and portfolio with your advisor, we’re always here to help.