Calm stock market may be anticipating Biden’s more normal White House
U.S. President-elect Joe Biden speaks as he announces members of economics and jobs team at his transition headquarters in Wilmington, Delaware, U.S., January 8, 2021.
Kevin Lemarque | Reuters
Joe Biden’s inauguration next week is expected to usher in a more traditional and normal presidency, and the stock market could continue to climb, but perhaps at a slower pace.
While strategists say the bull market is far from over, it has already priced in the promise of new stimulus spending expected from the Biden administration. The S&P 500 has risen 13% since the election, in part on the prospect of more stimulus but also on the hope that vaccines will lead to a post-pandemic recovery.
Biden unveils a much anticipated spending plan when he speaks Thursday at 7:15 p.m. ET. He is expected to outline his rescue package to fund vaccinations and provide aid to families and communities hit by the pandemic.
“I think we’ve gotten the Biden stimulus and more priced in,” said David Bianco, chief investment officer Americas at DWS. “They way I’m describing Bidenomics is spend now, tax later and don’t tax until the bond market objects…The markets are seeing things are better now and we’ll see if there’s payback down the road with higher interest rates.”
President Donald Trump saw himself as the stock market’s champion, claiming its performance as one of his achievements. The market did have a stunning run under his presidency, with the S&P 500 up 68% since he was inaugurated, and more than 78% since the day he was elected.
But it was a volatile rise. With the market’s sights set on Biden, stocks so far in 2021 have looked past ongoing political turmoil and remained calm. The S&P 500 only has two moves greater than 1% so far in 2020 with most days little changed. The S&P 500 is up about 1.6% on the year.
The S&P 500’s compounded annual growth rate was 13.2% from the day Trump was elected through this Wednesday. Since World War II, that was second best to the performance of only Bill Clinton, who saw compounded annual growth of 16.5% from the day he was elected until the end of his second term, according to CFRA.
From his inauguration day, the annual growth rate for the S&P 500 was 13.8% in the Trump years, the same as for President Barack Obama. Their performance is tied, right behind Clinton’s 15.2% growth rate, starting with his inauguration day.
For the stock market, Trump’s pro business policies seem to have outweighed some of the actions he took that were negatives for businesses, like tariffs and the trade war with China. Tax cuts and reductions in all sorts of regulations helped stoke stock market gains.
Trump’s behavior has been largely ignored by the stock market. He frequently attacked his critics on Twitter, chastised companies and for a while, called out Fed Chairman Jerome Powell for not easing Fed policy.
In his final weeks in office, he continued to falsely challenge the legitimacy of the election he lost. His supporters last week assaulted the Capitol, threatening the life of Vice President Mike Pence and others during the certification of the electoral process. Trump was impeached for inciting that mob. It was his second impeachment and the first time ever a president was impeached twice.
In contrast, Biden is seen as a steady hand, with experience as vice president and in the Senate. He is expected to seek to bridge differences between the parties, rather than accentuate the divide, and he is likely to have more traditional views about U.S. foreign policy and alliances. He is also expected to propose domestic policies to help narrow the social divide.
Then there’s the pandemic, which knocked the S&P down nearly 35% before Fed policy and fiscal spending helped fuel a massive stock market rally. That stimulus fueled market is the one Biden has inherited, and it is anticipating even more spending and a resolution to the rapidly spreading virus.
Biden is expected to unveil a stimulus package Thursday, and after the Georgia runoff elections last week, he has a very thin majority in Congress to help him push it through.
Political strategists expect the package to include stimulus checks for individuals, aid for states and local governments, expanded unemployment aid and spending tied to the pandemic and vaccine rollout.
The big question is how and when will Democrats find a way to pay for increased spending. For now, the market is not concerned about a potential hike in taxes that would undo some of the sweeping cuts Trump and Republicans made in his first year in office.
Because Democrats have a slim majority, they may use budget reconciliation to gain approval in the Senate, since it requires only a majority vote, not the 60 votes needed for much legislation. That would then require a plan to pay for he spending.
“I don’t think the market’s really thought how this process is going to work. In order for them to push anything through, they’re going to use reconciliation which means they’re going to have to pay for it,” said Barry Knapp, Ironsides Macroeonomics managing partner. “I think those tax hikes are going to get pulled forward.”
Policy strategists are divided on when tax increases would be introduced, but some say it could be this year for high income individuals and higher capital gains taxes. They expect the corporate tax rate to ultimately be raised to 25% from 21%, but that could come next year.
“The whole thing is probably worth 10% on the equity market,” said Knapp of the tax increases. “What’s going to be the overarching force right now is the business cycle, and we’re still early in that recovery…You still have a recovery in earnings. That’s a big tonic for the market. I wouldn’t get too bearish on this. On the margin it’s negative.”
Knapp said a big driver will be the recovery in global manufacturing and trade. “It’s not just the pandemic. They were depressed and prices were pushed down by the trade war,” he said.
Single digit gains?
The S&P 500 ended 2020 with a more than 16% gain. Wall Street largely expects to see a single digit gain for 2021. According to the CNBC survey of strategists, the average forecast is for the S&P 500 to be at 4,066 by year end. But a number of strategists expect to see a pull back in the first part of the year, and Bianco said there could be more than one 10% sell-offs in 2021. His year end target is 3,800.
“If it gets back to normal gains, that’s bad compared to 2020,” said Sam Stovall, chief investment strategist at CFRA. On average, the stock market has gained about 9% a year.
“It’s probably going to be boring because last year we had 109 days where the S&P was up or down by 1% in a single day, which is more than twice the average of 51, going back to World War II,” he said. “We ended up having 33 new all time highs last year versus the average of 23 going back to 1954.”
Stovall also expects a sell-off in the first part of the year. “Because it appears to be backloaded in terms of growth and earnings expansion, maybe it ends up being an even better year that gets off to a slow start,” he said.
Stovall said the market has already priced in stimulus, at least equal to the last $900 billion package.
“Maybe we take a break in the first quarter…There are a lot of things out there to make me think we’re overextended. The PE [price-to-earnings ratio] on forward 12-month earnings is 45% over its 20-year average,” said Stovall. “The Russell 2000 is up 37% off its 200-day moving average which is the highest on record, since the index was created in the 1970s.”
Michael Arone, chief investment strategist at State Street Global Advisors, said the market is already pricing in a lot of the positives of an economic recovery and the impacts of fiscal and monetary stimulus.
“It really does beg the question of how it will be the able to continue the momentum, particularly in the second half of the year,” said Arone. “From my perspective a lot of those forecasts are incredibly rosey because the bar has been raised so significantly and assets are pricing in near perfection. We could be setting up some disappointment.”
Arone said it doesn’t really matter to the market who is in the White House, and it is more the economy’s performance and earnings that drive stocks. The stimulus package could impact the economy, and he said
Biden has two choices. He could introduce a smaller package that contains payments for individuals, unemployment assistance, funding for the pandemic, and aid to states.
But instead of waiting, Biden could also add infrastructure spending to the package, a less likely scenario, Arone said.
“The price tag of that would be more than $2 trillion. It will send a sign of how confident Biden is, if he can get this accomplished,” he said. “It will be a signal to how aggressive Biden will push now that the Georgia runoffs are behind us, and he feels he has control of both houses of Congress.”