This week the stock market staged the biggest election week rally since FDR won election in 1932. This week alone, the Nasdaq surged 9.2%, the S&P 500 gained 7.6% and the Dow increased 7.2%. During an election week that was unlike any we have seen and that held the country in suspense, what drove this market rally?
While final votes are still being counted as I write this, Joe Biden has been named President-Elect and Democrats have retained control of the House of Representatives. Republicans are expected to retain control of the Senate, but this will likely be decided by a special run-off in January. This election was historic for our country in that we have elected the first woman and woman of color to the Vice Presidency, in Kamala Harris. Regardless of political affiliation, her achievement has been recognized as moment of American history. I understand that politics can trigger strong feelings and emotions and while there are important moral and social reasons to choose a candidate, in this post my goal is only to focus on the dynamics that are affecting the stock market this week.
Immediate reactions
We saw early on Wednesday morning that Wall Street was happy with the election results, even though nothing had been settled. In my opinion, this reaction was a confirmation that predictability is welcome when it comes to investing. The investing world sees the election of Joe Biden as a return to formal politics. Likewise, the result of a split executive and legislative branch indicates gridlock when it comes to major policy changes. What this means is that some of the more extreme changes to taxes and spending will have checks and balances. There is also an expectation that a stimulus package will now be agreed upon and move forward.
The biggest winners
The technology sector continued its strong year and financials and healthcare also put up big numbers this week. With a divided government, there is less expectation for increased government regulations on technology and healthcare. Since major tax changes will most likely be stalled and stimulus will be on the horizon, the financial sector expects a quicker path of recovery.
Many investors were expecting a continued sell-off and a rotation to value companies which include some of the most beaten down industries like energy. However, this week showed there is still some room to run in companies with high growth prospects.
An important lesson
Stocks taught us an important lesson this week. For the last few months, we have been rattled with uncertainty. No one really knew how the election would turn out and how the public would react. Both candidates painted dark pictures if their opponent would be elected. With all of this going on it is normal for the average investor to be afraid and worry about their investments. In the few weeks leading up to the election, market volatility increased, and sell-offs drove returns down. Those losses were erased this week in a quick turnaround.
The lesson is to stick with your investing plan, stay invested and focus on long-term objectives. The market moves so quickly, that it is typically impossible to time it perfectly. It is very easy to be consumed with the short-term and lose sight of long-term objectives and when we do this, we make mistakes. In fact, investors typically underperform the market indexes because of emotion-driven trades.
The seven deadly sins of investing
We talk a lot about seven negative factors that can hurt your investment results. These are:
Emotion
Disorganization
Myopia (Nearsightedness)
Impatience
Greed
Arrogance
Cowardice
The result of approaching investing out of any of these feelings results in mistakes. Common mistakes are:
Panic/ jumping to conclusions
Timing- indecision of when to be in and out of markets
Imbalance- trying to accomplish everything at once
Following- disregarding personal goals and being influenced by others or media
Short term view- thinking this time is different
Invest with purpose
This week was a good example of how short-term events can consume our attention but shouldn’t influence our long-term investment strategy. Make sure to create an investment plan and stick to it. This will help you avoid major mistakes, stay positive and achieve your financial goals.