This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Five Forces That Could Propel Markets during a Biden Presidency

Invesco US

Contributor:
Invesco US
Visit: Invesco US

Weekly Market Compass: Could the stars align for a ‘Goldilocks’ economy?

By Brian Levitt & Kristina Hooper

While legal challenges are underway, the Associated Press on Saturday called Pennsylvania for Joe Biden, which would push him past the 270 Electoral Count threshold. While this process may feel like an eternity, Biden’s timing from a market perspective may be impeccable. Don’t get us wrong. There are challenges ahead. COVID-19 cases are rising, and the threat of economically damaging lockdowns is elevated. However, history has taught us that the presidents who have experienced outsized market returns typically were inaugurated in troubled economic environments. Presidents Reagan (high and rising inflation) and Obama (global financial crisis) immediately come to mind. Rather than dwell on the near-term negatives, let’s instead focus on the potential tailwinds that would likely be supportive to markets in a Biden administration.

Five potential tailwinds that could drive markets

  1. Betting against an economic recovery is betting against medicine, science and human ingenuity. Significant progress has already been made in the fight against COVID, with scientists, government agencies and private industry working together to understand the virus, create and test potential vaccines, and pre-manufacture millions of doses of the most promising candidates to enable immediate distribution when a final vaccine is ready. The timing of a vaccine is still unclear, but is likely to emerge in the early years of the next presidential term.
  2. The US Federal Reserve is poised to keep interest rates at, or near, zero for at least the first two years of Biden’s term. There is $4.3 trillion in money market assets, up from $3.6 trillion at the beginning of 2020, earning effectively nothing in interest.1 Among the Fed’s stated goals is to inflate away 2% of the value of that cash each year, thereby incentivizing consumers and investors to do something with that money. The adage about not fighting the Fed will likely apply over the next four years.
  3. More fiscal support is likely forthcoming. While it may not be the outsized fiscal package that the Democrats had envisioned, it will likely be large enough to provide an additional boost to the economic recovery. Paradoxically, a more modest fiscal bill may serve to extend the market and business cycles, as it would be unlikely to bring forward the inflationary pressures that presage Fed tightening and the end of cycles.
  4. Stocks are historically cheap to bonds2, and yet stocks have outperformed bonds over most time periods.3 Government-related bonds are not only overbought compared to stocks4 but may fall under pressure as interest rates rise in an economic recovery. Investors are likely to determine that in this type of environment, there few alternatives that offer the growth potential of equities.
  5. Macro conditions do not need to be “good” for markets to trend higher. Instead, they need to be getting better. The US economy and S&P 500 Index recently experienced historic collapses. Economic activity and earnings growth are likely to be outsized during the next presidential term versus the 2020 comps.

Is this a “Goldilocks” environment?

Investors often ask strategists to compare the current environment to a period in the past. 2011 to 2014 comes to mind. Those years had a Democratic president, a divided Congress, an improving economic and earnings backdrop from very depressed levels, the Fed Funds Rate at zero, and stocks cheap to bonds. Forgive us for having déjà vu. That period proved to be favorable for equities and for credit.

In fact, this could be a Goldilocks environment — not too hot to cause inflation, but not too cold, either. A Biden presidency with a Republican Senate would be unlikely to see any increase in taxes, which was arguably the biggest fear investors had about a Biden presidency.  And a Biden presidency could mean a return to a more traditional, predictable approach to trade policy, which would likely result in less volatile markets.  But would it also mean stalled progress on other issues? Assuming a narrow Republican majority in the Senate, and a centrist approach by Biden, such a divided government might not mean total gridlock. In particular, Biden might be able to eke out a decent stimulus bill by forming a coalition with moderate Republican senators. While few may have expected this or wanted this outcome, it could prove to be a “best-case scenario.”

In short, Joe Biden has spent nearly half a century in politics, but his timing may yet prove impeccable.

1 Source: Investment Company Institute, as of Nov. 4, 2020

2 Source: Bloomberg, L.P., Standard & Poor’s, as of Sept. 30, 2020. As represented by the difference between the earnings yield of the S&P 500 Index and the 10-year US Treasury rate   

3 Sources: Bloomberg, L.P., Standard & Poor’s, looking at 10-year time periods, rolling monthly, going back to 1957. Based on the S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index.

4 Sources, Bloomberg, L.P., Organization for Economic Cooperation and Development

Originally Posted on November 8, 2020

Five Forces That Could Propel Markets during a Biden Presidency by Invesco US

Important information

Past performance does not guarantee a profit or eliminate the risk of loss.

All investing involves risk, including the risk of loss.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The Bloomberg Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

The opinions referenced above are those of the authors as of Nov. 8, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Disclosure: Invesco

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

NOT FDIC INSURED

MAY LOSE VALUE

NO BANK GUARANTEE

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s Retail Products and Collective Trust Funds. Institutional Separate Accounts and Separately Managed Accounts are offered by affiliated investment advisers, which provide investment advisory services and do not sell securities. These firms, like Invesco Distributors, Inc., are indirect, wholly owned subsidiaries of Invesco Ltd.

©2021 Invesco Ltd. All rights reserved.

Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Invesco and is being posted with permission from Invesco. The views expressed in this material are solely those of the author and/or Invesco and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

trading top