Biden Wins, Stocks Surge?

3103Biden Wins, Stocks Surge?

Jeffrey Viksjo CFA

With the election outcome (mostly) known, it’s clear the stock market views the result in a positive light. U.S. stocks rose 2% on the day following the election (as Biden took the lead in Wisconsin and Michigan) and another 2% the day after that (as Biden inched closer in Pennsylvania and Georgia). Stocks surged even higher on Monday after Biden secured victory and Pfizer announced positive vaccine results. So much for the contention that a Biden win meant almost certain doom for stocks.

 

So what happened? Did the market really prefer Biden over Trump after all?

 

We’ve argued for months that what happens in the Senate was as important as the outcome of the Presidential race. Despite Biden’s win, this election was far from the blue wave many expected, with Republicans likely maintaining control of the Senate (while runoff races in Georgia will ultimately determine the outcome, Republicans are favored to retain those seats).

 

We view the election of Biden with Republicans maintaining control of the Senate as one of the best possible investment outcomes. Historically, divided governments tend to produce the best stock market returns because it’s nearly impossible to pass any significant legislation, and the market tends to prefer the status quo:

  1. Biden’s tax plan is most likely dead in the water, meaning corporate tax rates won’t go up.
  2. Same goes for his health care reform (allowing Medicare to negotiate directly with pharmaceutical firms, etc.), and drug stocks rose as much as 8% following the election.
  3. A blue wave was thought to boost anti-trust efforts against the large tech stocks. This didn’t happen, of course, and big tech stocks were up between 8-10%.

 

Conversely, Biden and McConnell have a close relationship (they spent 25 years in the Senate together) and should be able to pass bipartisan stimulus bills (and possibly even infrastructure) which would help the markets. In addition, Biden is thought to take a different approach to China, and may repeal many of the tariffs so far stifling businesses.

 

History is on our side. Since 1910, the best stock market returns have come under a Democratic President with a split Congress (see chart below). Barring a surprise in Georgia, we believe the next four years will result in only incremental changes in policy, rather than the monumental changes many feared.

 

While many thought Biden’s election would end the market rally, it appears it was just the thing it needed to keep on going.

Democtratic President with split congress is great for the stock market

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