The Markets’ Strange Disregard for the Chaos in Washington
It was flabbergasting. A rampaging mob in the halls of Congress wasn’t enough to stop the American stock market.
The market held its gains, even as the rioters — incited by the president of the United States — stormed the Capitol and forced members of Congress to flee for safety.
The rally continued as Congress resumed the counting of the electoral vote and certified the election of Joseph R. Biden Jr. as the nation’s 46th president. The party ebbed a bit on Friday, after a Labor Department report showed that employers cut 140,000 jobs in December, the first drop since the spring and an ominous sign for the overall economy.
It was, in addition, the worst stretch, to date, for coronavirus deaths in the United States. Records for daily fatalities were set on Wednesday and Thursday and were almost certain to be surpassed again and again. Furthermore, the wounds inflicted since the 2016 election seemed to be only deepening.
Yet after a year in which the S&P 500 rose more than 16 percent — despite a calamitous drop in March — the stock market has managed to post improbable gains.
What accounts for the stock market’s splendid disregard for so many dismal, even apocalyptic, events?
I’d like to say that is the market’s vaunted ability to foresee a calm and prosperous future six months hence, but I don’t believe any such thing.
More likely, the rally simply reflects the greed of bullish investors, and, with some reservations, I confess I’m one of them. We fuel our enthusiasm with these frequently cited facts and extravagant hopes:
Interest rates are extraordinarily low. Although the yield on 10-year Treasury notes has risen lately, the Federal Reserve and other central banks have said they are determined to keep short-term rates low, and when rates are low, stocks and other risky assets are comparatively attractive.
The pandemic is the main cause of global economic troubles and it will eventually end. With vaccinations underway, Wall Street hopes that economic growth in most regions and sectors will surge later this year, along with rising corporate profits.
The chances of at least some further economic stimulus have increased. By sweeping the two contested Senate seats in Georgia, Democrats have gained a tenuous hold on both houses of Congress as well as the presidency. President-elect Biden will very likely be able to deliver more aid to people in need and to local governments, which is expected to increase economic growth.
Truly sweeping legislative changes will be difficult, if not impossible, given the Democratic Party’s razor-thin margin in the Senate and reduced majority in the House. While some increased spending is likely, this shaky grip on power implies that big tax increases on wealthy investors and rich corporations may not happen soon.
The election may have delivered something close to a Goldilocks alignment for the stock market. Mr. Biden’s cabinet picks so far suggest that he will govern as a centrist, and the market historically has fared well under Democratic presidents who do not have sweeping control of Congress. The possibility that the Biden administration will usher in a more efficient and inclusive government, with more spending and only moderate changes otherwise, is seen as a sweet outcome for stocks.
I’ve seen these arguments articulated, in whole or in part, in numerous expert analyses in the past few days.
In the aftermath of the victories in Georgia, for example, JPMorgan and Goldman Sachs have both revised upward their expectations for economic growth in the United States. And, in a report to clients on Thursday, UBS Global Wealth Management said that, thanks to the Democratic victories in Georgia, “further fiscal stimulus is likely,” while the slim Democratic margins in Congress mean that any possible tax increases will be “more limited in scope than either the Democratic Party platform or Biden’s own plan.”
UBS continued, “The tax hike is also likely to be smaller than the potential overall spending.” On balance, the report said, “With vaccination programs underway, we retain a positive longer-term outlook for equities.”
Such analyses help to justify the upward trend of the stock market but don’t explain why the rally withstood the assault on the Capitol.
Much as I hate to say so, I’m not yet confident that the country is on a clear path to safety and stability. Given the grave damage already inflicted on the United States, the risk of greater destruction can’t be dismissed. But it doesn’t appear to be incorporated into current stock market prices.
Then there is the question of stock price levels themselves. Current valuations are so high that some credible veteran analysts, like Jeremy Grantham, a co-founder of GMO, an investment firm in Boston, are warning that the stock market is already in a “late-stage, major bubble” that will inevitably burst.
“I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929 and 2000,” he wrote in a report this past week. Mr. Grantham may well be correct, though as he readily acknowledges, the stock market may well continue to rise for months or even years, and investors who heed his admonitions may miss out on great riches.
At the very least, the relentless rise of the stock market in the face of so many calamities is troubling for anyone with a perspective that extends beyond their own financial well-being.
I remain a long-term buy-and-hold stock investor, rejoicing in the swelling of my portfolio, but delighted also to be holding assets other than stocks. I have plenty of bonds, despite current low yields, in the expectation that they will provide protection when the magic spell that is keeping the stock market afloat loses its potency.
The halls of Congress are not impregnable. It may not be obvious right now, but the stock market is at least as vulnerable.
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