Here we are, less than 50 days into the Biden administration, and the stock market is up more than 20% since election day. Should we be surprised? What about all the doomsday predictions about the new administration’s policies tanking the economy? As expected, the new, democratically controlled Congress is proposing a COVID relief package that threatens to ignite inflation and increase interest rates. President Biden has reversed the former administration’s deregulation policy and wants to raise taxes—actions that would seem to be an anathema to the economy and good reason to get out of the market.
But then, everything the new administration and Congress have done since the inauguration was expected. Investors were aware of what a Biden administration would bring well before the polls opened. The stock market was ascending under Trump, and it continues to ascend under Biden. I guess you can say that, to the stock market, nothing much has changed—just the parties. That’s why I wrote in our November 3, 2020 post, Our Investment Strategy for the Election, “We look at the presidential election as we do any other event—we mostly ignore it.”
What Does the Stock Market Care About?
While the stock market can and does respond to short-term events, it is always adjusting in anticipation of changes in the economy six to 12 months out. The market doesn’t care about who or what party is in control, it only cares whether things are getting better or worse, and right now, it sees the same thing it did ten months ago when it rebounded from the depths of one of the briefest and steepest bear markets in our history. It is still looking at an economy ready to break out on the other side of a crippling pandemic. Beyond that, it sees nothing but uncertainty.
Of course, that could change. There are any number of things that could make things worse—i.e., policies that hold back businesses from hiring; continued lockdowns; higher interest rates in response to higher inflation; a COVID variant that slows immunity. However, if the market determines that it’s just a short-term event with short-term implications, it may react negatively at the moment, but it will still have its sights set on the future.
For the Stock Market, There’s Nothing New Under the Sun
That’s the way it has been for more than a hundred years, during which the stock market has managed to climb through world wars, a Great Depression, several severe recessions, double-digit inflation, terrorist attacks, and both Republican and Democratic administrations. For every bear market that occurred during that time, a more robust and more extended bull market has followed, driven by technological advancements, enduring corporate profits, and the sense that things are always going to get better.
With that understanding of the stock market, investors are better off ignoring the headlines and the politics of the day. Whatever short-term impact they may have on the stock market, it will be nothing more than a tiny, momentary blip on your long-term investment performance. The perfect antidote to stock market jitters is to concentrate your investment portfolio on high-quality, well-managed companies purchased at great prices. That’s a good reason to welcome the momentary blips.