Stocks are racing higher here on Inauguration Day. The question, as always, for us non-day traders is whether or not the day’s news and the stock market’s reaction to it is worthy of our time and attention.
Why Are Is The Stock Market Higher on Inauguration Day
Does the stock market just love Joe Biden?
Not really.
However, the stock market does love two things about today. One, is that there wasn’t any sort of violence or disturbance that would signal danger to the forthcoming economy. The second, is that with control of all three branches, Democrats are likely to enact at least some form of additional stimulus, which will help prop up the economy, and more importantly, stave off the reckoning of a possible recession.
Washington Can Finally Help the Fed Prop Up The Economy
As the Federal Reserve Chairman has been saying to anyone that will listen, the economy is actually on very weak footing right now. Sure, the stock market has been rising. However, the market’s optimism has largely been fueled by the idea that an America on its knees from the unchecked spread of Covid-19 has nowhere to go but up. Behind the scenes, however, is an economy that has still lost jobs relative to when the coronavirus first hit, and one where pretty much everyone other than Amazon, Walmart, Target, and the grocery stores has been hit by lower revenues. That economy is propped up by massive stimulus from the Fed in the form of zero percent interest rates, and aggressive bond buying.
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The Fed, however, can only do so much to prop up an economy, and most of its stimulus power affects banks, and Wall Street titans, hence the disconnect between the roaring stock market, and a Main Street worried about evictions and student loan payment deferments. What is necessary to keep the economy from tilting over into recession is additional government stimulus directed toward people, and teetering business sectors like restaurants, and other Main Street businesses.
While you would think that politicians of both parties want America to thrive, you would be wrong, at least while Mitch McConnell holds the reins in the Senate. McConnell has routinely made clear that his interest in not so much in making America thrive, but in making sure that no Democrat ever gets to do anything, so they can’t take credit for things getting better. With him sidelined, Wall Street is convinced that some additional stimulus, any additional stimulus is coming.That additional stimulus makes it more likely that the stock market can continue its rise, this time with a steadying, or even growing economy behind its otherwise phony optimism.
How To Invest for the New Presidency
As always, long-term investors are best served by holding a diversified portfolio tailored to their risk tolerance and long-term goals. Such a portfolio should not react to news events, even seemingly big ones like a new President. Keep investing, and let the diversification do its job.
For shorter-term investors, the markets have a way of trying to predict the winners of a new President by looking at his priorities and hypothesizing which sectors or companies will benefit most from those policies. This is a sucker’s bet. Companies are actually affected by their strategic choices and their ability to deliver. Any benefit from being one of the chosen companies is short-lived.
So, where should investors look now that there is a new President?
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First and foremost, stop worrying about the President. Despite what they like you to think in good times (and want you not to think during bad times), the Presidency is small compared to the U.S. economy. While sound policy decision do help the economy, the economy itself swamps them under. Recessions and expansions happen both when there is good policy, and when there is bad. Instead, watch the economy itself.
Wall Street Is Not the Economy
Always remember that the stock market is a leading economic indicator. By definition, stock prices represent a best-guess about the future possibilities for each company. When those guess are wrong, and they can be wrong, the corresponding correction can be severe, which is why stocks lose so much value when a company’s earnings are lower than expected.
Instead, pay attention to economic data and metrics. For this economy to last, we need to see better jobs, and lower unemployment. That fuels consumer confidence, which in turn fuels revenues when those consumers spend money instead of saving it for fear of worse economic times.
We also need to see recovery in the restaurant sector. Restaurants make up a HUGE part of the U.S. economy, and in are actually the leading employer in some towns. The more restaurants that fail, the more restaurant workers are out of jobs. This is some of the worst kind of unemployment because these workers have nowhere to go. (Restaurant skills are not very transferrable to other jobs.) These workers are also the ones fueling the Walmarts and Targets of the U.S. economy.
Keep an eye on Washington. What they do helps, or harms, but does not determine what actually happens on the streets of the economy. For that watch employment and the restaurant industry.
Where To Invest for a Biden Presidency
Again, watch the economic numbers, but if you are willing to assume that the economy will not teeter over the cliff thanks to additional stimulus (or are crazy enough to believe it doesn’t need any), then bullish investing should be your course of action. However, remember the stock market is priced to perfection right now. That is, all the realistic bullishness is already priced into stocks. Any bumps are likely to result in a dramatic selloff.
It is time to tighten up those stops, or to hedge your portfolio with options, but be sure to let your winners run. If things go well, they’ll have plenty of upside. For more conservative investing, look for well managed companies paying solid dividends, companies that you’ll be willing to hold for several years through any possible sell off and recovery.
Author
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson did not own any securities mentioned above, however, that may change at any time without notice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.