Last Week in Review: Three Things the Markets Told Us About Election Day
Many were expecting uncertainty and chaos emerging from Election Day, and those people were not disappointed. Joe Biden will be the next president of the United States.
Even when the president was unknown, Stocks skyrocketed, and Bond prices soared, causing rates to decline.
What caused such a market reaction?
Here are three things the markets told us about Election Day:
- It appears we may have a split Congress in 2021 as Republicans may maintain control of the Senate (at least as of this writing). This balance of power will likely lead to more gridlock in Washington D.C. over the next couple of years. This means no radical changes within the economy as it would be hard for Congress to agree on any new policies. Stocks rallied on the notion that any meaningful corporate tax hike would be unlikely. At the same time, both Bonds and rates also did well because they too embrace a government stalemate.
- The forthcoming stimulus package just got smaller. With a split Congress, expect the next stimulus package to be quite a bit smaller than previously anticipated. We believe and hope we may see targeted stimulus over the next couple of months. Bonds like a smaller stimulus package as it means less new Bond supply, less inflationary pressure, and less aid to the economy.
- The Fed is not going anywhere. A split Congress makes it difficult to get big fiscal plans passed. This means the Fed may be called upon to do more to help grow the economy and is not likely to hike rates any time soon — possibly years from now. And this is another reason why Stocks skyrocketed higher this week. This past Thursday, at the Fed Meeting, they reiterated their commitment to buying $120 billion worth of Bonds each month to help keep long-term rates, like mortgage rates, low. As the old saying goes, “Don’t fight the Fed.” They are committed to helping promote maximum employment and economic growth, which Stocks love.
Bottom line: The backdrop for housing looks amazing and the Fed will continue to support the economy alongside fiscal stimulus from the government.