The Goldilocks Election and Market

What a stressful few weeks these have been for all of us! No matter which party you support, it was a very tense time, and I suppose it continues to be. However, the markets haven’t reacted much to the election, which is totally expected. As we’ve written about several times in the past few months, stock markets crave certainty, so whether the POTUS is Biden or Trump, the market simply wants to move on. If Trump had won, we wouldn’t have seen any change, as the markets already knew his policies. Biden is also a known entity in Washington, so that wouldn’t have made much difference either, which is exactly what happened.

We could end up with a perfect scenario for the stock market: a Goldilocks market. A Democratic president and a split congress (assuming the Republicans hold the Senate), have historically resulted in the highest market returns. Why? Well, in general, whenever one party has full control, the policies tend to skew too heavily to one side, and the markets don’t really like that. Also, having a split congress tends to check the other party in power. The Founding Fathers were brilliant to craft such an amazing governmental system! Assuming the Senate stays Republican, we are unlikely to have any tax law changes, as they wouldn’t get through a Republican Senate. Couple that with a vaccine on the way and ultra low rates from central banks across the world, and you’ve got a perfect market scenario. That is why we’ve had such a powerful rally, post-election.

As we’ve discussed recently in Does The Market Make Sense, the vast majority of gains have been from a handful of tech stocks. Those stocks have had an incredible run, but also their valuations are stretched, just like the tech bubble in the early 2000s. As you can see from the chart below, the difference between growth (think tech stocks) and value (pretty much everything outside of tech) is at the widest margin ever.

This wide gap means that at some point, we’ll see a strong return to value investing. It’s like a crouching tiger, ready to pounce! We saw a taste of that post-election, with one of the biggest changes from growth to value in almost 2.5 decades.

Is this is a sign of a changing market? Possibly, but we have no way to know when that will happen. In the year 2000, growth beat value investing over 1, 3, 5, 10 and 15-year periods of time. By the end of 2001, value took over and beat growth over 1, 3, 5, 10 and 15-year periods of time. That change was very quick, but not unusual at all; as that is what has happened many times before.

So what should we do? I know I sound like a broken record here, but this is exactly why you should continue to diversify with both growth and value. Also, it’s a smart strategy to ignore all the new headlines and invest for the long term. Remember my favorite analogy: if you are going on a trip next year, checking the weather every hour right now is not helpful. Stop worrying about how every news headline can affect your finances, and think long term!

As always, we are here to answer any questions you have. Be safe during the holiday season!