One thing that everyone can agree on is that the political climate in 2021 will look different than it did in 2020. But how will this affect saving and investing in the New Year?
Depending upon where you choose to receive your information about the world, or depending upon the people you talk to, you’ve probably heard one of three things about the outlook for capital markets in 2021: 1) The market is going to crash, 2) The market is going to rebound, or 3) Nobody ever knows what will happen with the stock market.
While the third perspective is the wisest, you’re not reading this article to hear, “nobody knows; so, just roll the dice and see what happens.” At the same time, it’s not wise to make predictions about things that are unpredictable. Fortunately, we have a happy medium to provide clues about what to expect in the future. This medium is called history.
As Mark Twain so eloquently said, “History doesn’t repeat itself, but it often rhymes.” Thus, we can look back in time and find the rhyme that can help us look ahead to the political and economic climate of 2021.
Let’s begin our use of history by removing a disputed argument about politics and investing. Which is best for stocks, Republicans or Democrats? The collective herd of investors, commonly referred to as “the market,” does not prefer one political party over the other. This indifference is likely due to the fact that the stock market has performed about the same for each party over time.
In a recent study conducted by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company, the average historical return for stocks is a statistical tie between the two major political parties. Looking back to 1789 (yes, investing took place back then), the study found that the average four-year annualized return during any given presidential term was 8.6% for Republicans and 8.8% for Democrats.
Perhaps more noteworthy, the investor herd prefers gridlock to domination by any particular party. This is because investors like a predictable stalemate (and perhaps the limited ability for politicians to screw up the economy). Taken alone, this rhyme of history shines a positive light on 2021 now that the Democrats have a narrower majority in the House of Representatives and the Republicans have fewer seats in the Senate.
In summary, 2021 appears to be a year when politics will be relatively harmless to the economy and reasonably predictable for investors, who appear to be comfortable with the new political makeup in Washington, D.C. For example, as President-Elect Joe Biden named his cabinet in November and December, the market did not react negatively. With names that are familiar to investors, particularly Janet Yellen for Secretary of Treasury, and other cabinet members that are throwbacks to the Obama administration, investors are not spooked by these familiar, predictable decision makers.
As for specific policy that could affect the stock market in 2021, the odds are slim that any major legislation could be passed that would do damage to the macro-economy. With that said, it’s clear that President-Elect, Joe Biden favors an increase in tax for individuals earning more than $400,000 per year, an increase in the corporate tax rate to 28%, and an increase in capital gains and dividend income above $1 million at the 39.6% income tax rate. It’s unlikely these new taxes will be enacted in 2021, nor will they impact the vast majority of Americans in the short term.
Let’s get to the bottom line: the most important factor that investors consider is not politics but the health and mood of the American consumer. This is because consumer activity is two-thirds of the U.S. economy. A happy and spending consumer translates to better corporate earnings, a healthier economy, and a growing stock market.
What would make the American consumer happy in 2021? Low interest rates, an opening economy, and lower unemployment rates. All three of these are lined up for the New Year. The Federal Reserve has all but guaranteed its low-rate policy through 2023; Dr. Anthony Fauci has predicted that any American who wants a vaccine will have one by June; and unemployment rates are predicted to continue their decline.
Further underscoring the potential for consumer activity in 2021 is a three-word phrase you are certain to hear more as the year progresses: pent-up demand. For example, since not many Americans traveled anywhere last summer or over the holidays, you can bet that they will be doing so in the summer of 2021. This sets the stage for a massive jump in consumer cyclical stocks such as those related to travel and entertainment in the second half of 2021.
Also, consumers don’t generally think about which political party is in power before ordering goods on Amazon, and they don’t think of politics when choosing a vacation destination. If the consumer is spending, the economy is growing and stock prices are climbing.
With all that said, prudent investing and wealth management is about much more than politics and short-term market trends. Portfolio construction will primarily be based upon the investor’s financial goals and tolerance for risk.
Also, remember that time in the market beats timing the market. For a long-term investor, it’s wise to stay invested through all market environments. Keep in mind that 80-90% of gains for stocks occur on less than 10% of trading days. You can’t afford to be completely on the sidelines during these days.
Most important, remember that life is not about making money; money is about making a life.
Kent Thune has 22 years of experience as an investment advisor and wealth manager, helping clients navigate three of the worst bear markets in history. Thune is a Certified Financial Planner® and is the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments. The information in this article is provided for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
