Five Drivers of Markets in a Biden Administration
The reasons to be bullish on stocks continue to mount.
Bloomberg, January 20, 2021
Which matters more to equities, valuations or the economy? This is not an abstract academic question, but rather the core of the debate between the stock market’s bulls and bears. Answer that question, and I can probably tell you what your portfolio looks like, and whether you believe stocks are going to go higher or are due for a major correction – or worse.
The problem with these binary debates is that they tend to narrowly ignore the complexity of markets. How quickly will the post-pandemic economy recover? Are we over- or under-estimating future earnings? Will investors still remain enthusiastic for equities as they get pricier? These discussions are subtly cloaked guesses as to what the world will look like over the next 12 months in a Biden administration, including whether these improvements in economic activity and corporate earnings are already reflected in market prices.1 though there are other — admittedly modest — data points supporting that view. Let consider these drivers of the markets in 2021:
• Market Reset: What happens when markets fall 30% or more? Before last year, we only have five examples going back to 1950 when the S&P 500 Index fell that much: 1970, 1974, 1987, 2001 and 2008. On average, the ensuing five-year period following a 30% crash shows returns that are about 90 basis points higher annually than any five-year period on average.
The caveat is that this