Well, we have a new president! And given that this is day two, I’m assuming the world hasn’t ended, and that you’re not about to sell everything off and go into hiding (please, don’t!). You may remember us talking about market trends tending to do best when there’s a democrat in the White House and a split House and Senate – so, what happens when everything is controlled by the Democrats? You’re probably wondering what’s going to happen now.
Historically, that mix has shown the best average GDP and average return of the S&P at 13.2 percent annually. You may be surprised (or you may not), but there’s 18 years of data to back that up – that this mix (or lack thereof) produces the highest GDP. Think about it: with Democrats in the White House, we usually see more government spending on programs and social services. I don’t think 2021 will play out any differently.
After recent nausea-inducing fights in Washington – and I’m talking about both sides – our elected leaders have collectively made me wonder if this is the best America can do for Americans. As a general rule, I don’t do politics due to my general disdain for the system, but as a financial planner, I do have to look at how politics can affect the markets. I believe the initial stimulus of the CARES act will be dwarfed by the one I anticipate by the end of February.
Now, I’ll make no judgement on whether it’s needed or not. But any printing of money or putting additional money into the financial system will lead to economic action as the money turns within the economy: checks are received; the money is spent (for example) on dining out; after paying the waiters, hosts and bus boys, the restaurant owner puts money in his own pocket for the first time in a year.
As that money continues to rotate through the system, there is significant economic activity happening. This could lead to a Roaring Twenties scenario in which the economy grows at a pace not seen in some time, as the economy rebounds from being shut down. Of course the Roaring Twenties ended abruptly on October 29, 1929 when markets crashed and the Great Depression brought years of economic hardship. But my thought is, from a stock market and economic view, that within four to eight years, we will see increased spending on infrastructure – think bridges, roads, airports. I also believe that as spending happens in major areas, there will be a significant trickle down affect (of greater than $600) to the waiters and other hourly workers of the world.
These programs will benefit large American companies, the majority of which are represented in the stock market. There will be bumps in the road, and if you watch CNN or FoxNews, you’ll experience even more bumps because you’ll think the world is ending every single day. That’s why I don’t watch either one. But as this trickle down reaches the large-, mid- and small-cap US companies that cut costs in 2020, they’ll start to profit, and money will be spent on increasing dividends to stock owners. Money will also be spent on buybacks, as those companies go to Wall Street and buy back stocks, reducing the number of shares available to trade, thereby supporting (or floating) stock prices during market volatility, which allows equities to move higher when buyers return.
So, after being reminded how stimulus money will be spread through the economy and what companies will do as that money trickles to them, why would you consider selling simply because the election didn’t play out the way you wanted?
If you have questions or concerns about the state of the world, I get it. You’re not alone. But please, pick up the phone and talk to us before making any drastic decisions. We’re here to help you plan for the long-term.
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