A few months ago, former Goldman Sachs CEO Lloyd Blankfein suggested that the stock market didn’t seem worried about a Biden administration, even though the incumbent president’s policies were more “market friendly.” The lifelong Democrat said people may think their stocks will “do better with higher taxes and increased regulation than with nastiness and scorched earth.”
In the first day of trading since Joe Biden was projected to become the 46th president, investors appear to be at ease with that result. Futures linked to the S&P 500 Index of US stocks rallied, and a benchmark of global stocks, the MSCI world equity index, rose to a record high. Historically, US stocks haven’t always risen after a candidate was projected to become the next president, although the S&P 500 also gained after president Donald Trump surprised markets and polls to win the election four years ago.
The S&P 500 soared even higher, reaching an all-time high, after news of a promising Covid-19 vaccine from Pfizer and BioNTech emerged. According to the companies, it is more than 90% effective, which could be an important breakthrough in getting government regulatory approval. Until there’s an effective and widely distributed vaccine, the biggest question for the global economy is the spread of Covid-19, which doesn’t care who is president. Whereas Trump reportedly sidelined experts like infectious-disease specialist Anthony Fauci, Biden is planning to convene a coronavirus task force studded with prominent physicians.
Traders may also be celebrating gridlock in Washington—the idea that a divided Congress will result in a skimpier stimulus package but with little scope for higher taxes or regulation—and perhaps less drama coming from the White House. “The market has swallowed, hook, line, and sinker, the notion that a Biden administration that is shackled by Republican control of the Senate delivers less confrontational trade policy, easier fiscal policy without some of the more extreme measures favored by the left wing of the Democrat party and therefore not enough fiscal easing to alter the outlook for Fed policy,” says Kit Juckes, an analyst at Societe Generale. He expects the Federal Reserve to continue taking exception measures to keep interest rates low and boost economic growth.
There are signs that investors are less worried about a political crisis, even though Trump has yet to concede. The VIX volatility index, also called the “fear gauge,” has fallen for six straight days to its lowest level since late August. The Cboe benchmark measures expectations for price swings in the S&P 500 index during the next 30 days and is seen as proxy of anxiety among investors. The VIX has declined even though Trump has mounted a series of legal challenges, alleging the vote was riddled with fraud. So far, Trump has mostly lost in court.
There are indications, however, that traders are on their guard about inauguration day. Some Republicans, including former president George W. Bush, have congratulated Biden and vice president Kamala Harris on their victory, but Trump, some members of his family, and some Republicans in Congress still claim the election was illegitimate. “The margin of victory is so large that the litigation really won’t make a difference,” said Josh Blackman, legal professor at South Texas College of Law, in an interview on Bloomberg Television. “Even if president Trump wins every single one of his lawsuits, he would still be behind in the votes.”
To be sure, the US stock market has had a powerful run during Trump’s presidency, with the S&P 500 index of large American stocks rising to record levels during his administration. By some measures, US companies have traded at over-valued levels last seen during the dot-com boom in 2000. Trump often polled better when Americans were asked who they trusted to handle the economy.
In the meantime, there’s a case to be made that Washington politics will be less explosive in the coming years. The Trump administration was marked by unpredictability, as corporate CEOs from Seattle to Beijing often found themselves in the crosshairs of Trump’s Twitter posts. By contrast, a Biden administration could be seen as more stable and predictable. “We have a combination of good fiscal stimulus, easy monetary policy, and less uncertainty on foreign policy,” said Alberto Gallo, head of macro strategies at hedge fund Algebris Investments. “Investors were very much hedged and prepared for the worst.”