With a likely split-Congress outcome lowering the chances of substantial policy shifts, investors are refocusing on supportive fundamentals and the recovering economy. Raymond James CIO Larry Adam offers his perspective.
Coming off its best week since April (7.3%), the S&P 500 rallied about 1.2% on Monday and narrowly missed setting a new record high. The index’s strong performance followed the naming of Joe Biden as president-elect and Pfizer’s announcement of a vaccine efficacy rate above 90% in its Phase III trials.
Although the two key run-off Senate elections in Georgia won’t occur until January, the outcome of the 2020 election appears to be split government, and with substantial policy shifts seeming unlikely, investors have been able to refocus on the overall supportive fundamentals.
As for Pfizer’s announcement, a vaccine seems to be developing at warp speed given that we only received positive Phase I study results about six months ago. With Pfizer’s efficacy rate well above the necessary 50-60% threshold, it’s hard not to join the markets in celebrating this scientific feat (the previous quickest vaccine development on record was four years). While there are still many questions surrounding the durability and production goals of this vaccine, this is a monumental step toward the eventual return to normality.
Markets see split government as a positive
Ahead of Election Day, most investors assumed that delayed results in the presidential and congressional elections would induce volatility and cause the markets to falter. While the final results were unknown, it was apparent that split government was the most likely outcome, and instead the S&P 500 had its best election week performance since 1932.
Leading this rally was the decreased probability of a tax increase, which we expected would reduce 2021 S&P 500 earnings by about 10%. With policy risk subdued, investors were able to focus more squarely on the fundamentals, which we believe are supportive of equities in the longer term.