With a Joe Biden presidency and divided U.S. Congress, investors may find themselves in a great position for a bullish market outlook.
“Investors often ask strategists to compare the current environment to a period in the past. 2011 to 2014 comes to mind. Those years had a Democratic president, a divided Congress, an improving economic and earnings backdrop from very depressed levels, the Fed Funds Rate at zero, and stocks cheap to bonds. Forgive us for having déjà vu. That period proved to be favorable for equities and for credit,” Brian Levitt, Global Market Strategist, Invesco, said in a research note.
“In fact, this could be a Goldilocks environment — not too hot to cause inflation, but not too cold, either,” he continued.
Levitt highlighted five tailwinds that could drive markets ahead.
For starters, significant progress has already been made in the fight against COVID-19, with a potential vaccine already on the table.
An accommodative U.S. Federal Reserve will maintain interest rates at, or near, zero for at least the first two years of Biden’s term. The adage about not fighting the Fed will likely jive perfectly with the next four years.
Investors can also expect more fiscal support. While it may not be the outsized fiscal package that a Democrat controlled Congress and White House would had envisioned, it will likely be enough to provide an additional boost to the economic recovery. Levitt even argued that a more modest fiscal bill may extend the market and business cycles since it won’t fuel inflationary pressures that presage Fed tightening and the end of cycles.
Meanwhile, stocks are historically cheap to bonds, and yet stocks have outperformed bonds over most time periods. Government-related bonds are overbought compared to stocks and could even face increased risks from rising interest rates in an economic recovery.
Lastly, macro conditions only need to get better to help markets push higher. Economic activity and earnings growth could be outsized during the next presidential term.
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