Why have stocks rallied after the US election?

Stock markets pushed higher in the wake of election night, as the longer-term uptrend reasserted itself.

Stock market rallies despite no clear winner

It wasn’t supposed to work this way. While Joe Biden is on course to win the election, he did not score an immediate victory, and on current results the Senate will remain in Republican hands. This reduces the chance of an immediate stimulus programme, and should have seen markets struggle.

But stock markets never do what people expect them to. As election night went on, stock market futures moved higher, and continued to do so during the cash session. Overall, the week saw the best performance for indices since June, and helped to recover much of the ground lost in the last week of October.

Biden’s incomplete win spurs risk appetite

Perhaps one explanation is that the division of government between the (likely) Democrat White House and the still-Republican Senate means that some of the former’s policies will now not be enacted. For example, an increase in capital gains tax is now much less likely, at least in the short term, while moves to reduce fracking in the US will encounter opposition in the Senate.

Ultimately, it will make a big fiscal stimulus programme a much more dicey proposition too, although one will still be passed, even if it is of a smaller size. This is also possibly market-positive, since it means the Fed will have to do more in terms of monetary policy, something usually positive for equities.

It is still a bull market

We should always be wary of rationalisations after the fact. This is still a long-term secular bull market, which has weathered multiple corrections in the past few years, most notably of course in March. The US economy suffered a severe hit from Covid, but it is recovering, if slowly, and with it company earnings.

The market found the strength to rally because equities are still the default destination for investors seeking growth and income, and because bonds also rallied on expectations of more Federal Reserve easing. Market breadth continues to point towards higher prices, with the weekly advance-decline line continuing to rise.

The bounce in stocks over the past week will be partly driven by the election, but the longer-term path is still being pushed by economic growth and earnings, and investors should not lose sight of this fact.

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