Another major political event, another set of incorrect market predictions by commentators.
In August last year we wrote an article previewing the upcoming US presidential election and the potential impact on businesses, the economy and stock markets.
Our conclusion was that while “a common perception is that Democrats are bad for business and the economy…. we do not necessarily think a Biden win would be negative for markets.”
An eventful election campaign is now over, and Biden has been inaugurated as the 46th President. But like Brexit and Donald Trump’s election before, the predictions of a market decline turned out to be wrong. The S&P 500 Index has returned 14% since the election. This gain is the one of the best for a first-term president since World War II and higher than the 10% increase under Trump over the same timeframe, much to Trump’s annoyance I am sure.
This is not to say that certain industries and companies have not been negatively impacted – the recent announcement to end federal contracts with private prison providers is one example.
Stimulus spend and tax increases on the cards, but likely to be watered down.
The recent senate wins in Georgia gave Democrats a majority in the Senate which should help them to enact more of Biden's policies even without Republican support. However, major legislation will still struggle to get across the line due to the requirement for a super-majority vote (and therefore Republican approval).
The new administration is focussing its initial efforts on a $1.9 trillion COVID relief proposal, including $1,400 stimulus checks, federal unemployment benefits, aid to state and local governments, and a $15 federal minimum wage.
Corporate tax is another policy that Biden is keen to progress. He campaigned to increase corporate tax rates from 21% to 28%, and to raise income taxes for those earning more than $400,000.
However, there is still no certainty that either of these proposals will be passed, and the more likely scenario is that they will be watered down. There has been pushback from both Republicans and even some moderate Democrats – especially with many small businesses still reeling from the pandemic and government deficit at all-time highs.
What does this mean for markets?
Well, anyone looking for a prediction of future market returns will be disappointed. Our answer is the same as our previous article – we just cannot accurately predict how the market will react to political news. The same experts and television pundits who were predicting Biden’s antibusiness policies would tank the markets are now scrambling to explain why his polices are driving markets up.
This narrative keeps shifting – first it was that Democrats would not win the Senate and they would be unable to pass harmful legislation. Then when they won Senate the narrative became the majority would allow them to pass big stimulus spend. This just shows that even in hindsight, we do not always know what is moving the markets.
We continue to focus on fundamentals and will leave the market predictions to others.
As always, we believe our efforts are best spent focussing on the fundamentals of the businesses we look at. Longer term, stock prices are driven by underlying company profits and we think that finding competitively advantaged businesses that can grow earnings over the long-term is the right way to achieve good investment outcomes. That is not to say we ignore new policies and their impact on business earnings and risks. These are captured in our assessment of the relative merits and expected returns for each potential investment. Clearly higher taxes and minimum wage increases will depress corporate earnings and we reflect that accordingly.
But as for trying to predict market moves, we will leave that to the television pundits.