- Markets like a ‘Goldilocks government’ - a unified government where a party controls both Houses without an overwhelming Senate majority. The Democrats control all three so the legislation process points to being more efficient but, because the Senate is so evenly divided, the most ambitious plans will be kept in check. This creates policy moderation and predictability, and the markets like that.
- Are Democrats bad for business? An increase in taxes may curb corporate profits but going back to 1901, the Dow Jones has average 17.77% when the Democrats were in power. It is never a good idea to look at the markets through a political lens.
- The Federal Reserve continues to be accommodating. Low interest rates are expected to remain until late 2023/early 2024. We expect this to create a borrowing bonanza at both the household and corporate levels, which will fuel the markets.
- Low interest rates will cause investors to look elsewhere for yield. Investors will naturally turn to equities and REITS, further driving the equity markets.
- There are opportunities in the international equity markets. International markets are trading at 79% of the relative price to earnings ratio as compared to the S&P 500.
- A strong finish to 2020 give hope to 2021. LPL Financial Chief Market Strategist Ryan Detrick explains that “a 10% or more gain the final two months of the year has equaled a higher S&P 500 the following year every single time since World War II.” The S&P 500 was up 14% in November and December, marking the best end to a year since World War II. On five previous occasions when the S&P 500 climbed more than 10% (1954, 1962, 1970, 1985, and 1998), it has averaged more than 18% the following year.
- The battle of the Two V’s. It may not feel like it now but the vaccine will eventually prevail in the battle with the virus. As we head into the spring and summer month and more people are vaccinated, we will see more of the economy open little by little. As we have mentioned before, there is a tremendous amount of pent-up demand waiting to be satiated and that will fuel those industries that have been held hostage by the virus.
The moral of the story is to stay invested and diversified…and tune-out the television and social media. It is important to keep focused on your long-term plan and not react to the short-term craziness. As always, feel free to call us regarding your personal situation.