• Why has the stock market been so strong since Election Day?  In our view, the prospect of a Biden victory and a GOP Senate was not expected which is partially why we are seeing equity prices soar.  Add the good news that Pfizer and Moderna both announced very good test results for their vaccines, comparable to the success rates seen for mumps and chickenpox.  Also, the economy is chugging along despite the pandemic, and Corporate America appears to be getting ready for a stronger economy.  There are dozens of reasons why the stock market likes or dislikes having President-elect Biden combined with a split Congress, but here are the ones we think have had the most impact on driving equity prices higher:

    –  No Dem sweep likely means no big tax hikes or rollback of the GOP tax cuts at least for the next two years when the 2022 mid-terms occur.

    –  No more trade wars.  This is an area where President Trump’s stance acted as a headwind to the global equity markets.

    –  Less of a leftward tilt when it comes to the regulatory environment.  Sweeping reforms are typically viewed as bearish for the market.

    –  Less of a chance that mega-cap tech gets hurt.  Democrats and Republicans are mad at Big Tech for different reasons, and neither side has full power to get its way.

Note:  Throughout this commentary, we repeatedly refer to a “split” Congress.  Investors will be closely watching the Senate runoff elections in Georgia in January for a final tab on the Senate mix.  Any changes that impact the political landscape could change the trajectory of the market.

  • A divided Congress is good for stocks, according to an LPL Financial study going back to 1950.  A split Congress meant the S&P 500 returned 17.2% annually.  When the Republicans controlled both chambers, the increase was 13.4%.  When the Democrats ruled both the House of Representatives and the Senate, the index rose 10.7%.
  • The election aside, it is interesting to look at how consumption patterns have changed since the pandemic considering that the U.S. economy is more than two-thirds consumption-based.  Goods have surged while services have plummeted.  For example, the demand for many durable goods, including cars, has grown 7-9% over the last three quarters.  Grocers have exploded with volumes up 6.5% in three quarters.  But food services and accommodations are down 19.5%, recreational services down 32%, transportation services down 23%, and discretionary health care consumption down 7%.  Housing/utilities and financial services are stable (source for statistics:  Bespoke Investment Group).  The shift in consumption patterns certainly hasn’t been voluntary, but the trend of “experiences over things” has been completely reversed.


The new political landscape may have important implications for a number of equity categories and sectors.  Here are a few of the areas that will be impacted the most:
Financials:  The regulatory climate for banks and other financial companies could get tougher in a Biden administration, but not materially so with a split Congress.  Still, interest rates may stay lower for longer given a (likely) smaller stimulus package and less deficit spending.  This will probably result in a continuation of a flat yield curve which will be a headwind for bank earnings.  However, bank stocks offer very low valuations along with above-average dividend yields.
Health Care:  A split Congress adds significant hurdles for major health care reform, a big positive for the health care sector.  A public option to compete with private health insurers could have been very damaging for managed-care organizations like United Health Group and Anthem.  Drug price regulations are likely, but should be manageable.  Health care stocks, like banks, offer attractive valuations and will continue to be over weighted in client portfolios.
Technology and e-commerce:  Technology and internet companies may be big beneficiaries of a split Congress, as the regulatory environment was expected to be much tougher under a Democratic-sweep scenario.  We will continue to own a number of the FANG+ stocks.
Energy:  Fossil fuel companies can breathe a sigh of relief that the Green New Deal is dead on arrival with a GOP Senate.  However, the demand for oil and gas has been devastated by the pandemic.
Growth over Value:  Given the tailwinds for technology and internet-related stocks, it is difficult to imagine value stocks taking over market leadership.  Growth stocks are still posting impressive earnings numbers compared to choppy results for value stocks.  We maintain our preference for a growth tilt at this time but always maintain a mix of both because of the unpredictability of growth/value cycles.
Developed international equities:  Newly implemented lockdowns put a strain on economic growth prospects in Europe and other developed regions.  U.S. equities should continue to lead the global markets.