With the election finally ending and the holiday season right around the corner, it is important to discuss where the market stands and the implications of previous events. This time of the year tends to be hectic, with traveling and shopping people keep busy, even amidst the COVID-19 pandemic. This makes it even more important to relate our thoughts as to where the market stands as of early December 2020.
With Joe Biden seemingly emerging as the winner of the Presidential Election and a high likelihood of a split congress, it is important to look at what that means for the equity markets. The three possible combinations for the power dynamics of Washington DC are either Democrat, Republican, or a Split Congress. Surprisingly, a split congress has the highest average return of the market, with the S&P 500 averaging a 17.2% return during such scenarios compared to a 13.4% return under a Democrat congress or a 10.7% average return under a Republican congress. The reason behind this is likely the fact that neither party has the ability to push through onerous regulations and compromise is valued above all. Leading up to the 2020 election, there was a large amount of talk about Joe Biden wanting to raise taxes, but he may not be able to achieve this with a split congress.
It is important to reiterate a topic that we discussed in the November market update regarding staying invested. The best overall performance occurs when a person stays invested through both Democrat and Republican administrations. The returns achieved by only investing when a particular party is in power are dwarfed by the returns of a long-term portfolio that is never out of the market for long periods of time. Now that the likelihood of a split congress is particularly high, it is very important to emphasize this point. While the incoming administration will be a “Democrat” white house, the split congress provides a check on any excesses of the incoming party and as such provides a good reason to stay invested in the market.
Remember that our portfolio are adaptive. We will continue to monitor the markets, the elections, the economy, and Covid and make changes as needed. As always, we are on standby to answer any questions you might have about our individual accounts.
Portfolio Manager at The Retirement Guys FormulaBack