U.S. stocks kicked off a furious rally this week. Many pundits credit investor enthusiasm to the media’s pronouncement over the weekend that Joe Biden had won the November 3rd election.

One market analyst referred to the rally as the “Biden Bounce.” Others pinned the gains on the announcement from Pfizer that in trials, its COVID-19 vaccine is over 90% effective. That gave investors hope that there is a light at the end of the tunnel when it comes to the economic impact of the pandemic. 

Whatever the reason, the Dow Jones Industrial Average kicked off the week by soaring over 5%. That included the largest single-day point gain in the index’s history. And while the DJIA hasn’t eclipsed its all-time high set earlier in 2020, it’s certainly within spitting distance. 

But in this volatile year, we’ve seen that markets don’t rise in a straight line. Wednesday and Thursday saw the market give back some of those gains.

This leads us to wonder if the stock rally will continue, or whether it will run out of puff. Let’s look to see if we can figure out just how far the bull may have to run…

Biden Wins The White House – While President Trump is yet to concede, amid court battles and recounts, as far as Wall Street is concerned, the election is over. And that means Joe Biden is all but certain to be the next president. 

Biden’s supporters have noted the stock market rally as evidence that investors and the business community is thrilled about the incoming president’s policies. But there’s reason to doubt that type of claim. 

Recall that Moody’s had estimated Biden’s tax plan (which includes higher capital gains and corporate taxes) would act as a net headwind for U.S. stocks. That includes slower growth and lower dividend yield. 65% of S&P 500 CEOs surveyed in October indicated Biden’s proposed tax increases would result in slower growth and lower employment.

Additionally, while AP, Fox, and CNN all pronounced the win for Biden/Harris on Saturday, when markets were closed, don’t forget that stocks had actually been rallying since November 2nd. That was before the election and before Biden had been declared the winner. 

Furthermore, U.S. stocks had rallied in unison with stock market rallies in Germany, Japan, UK, and other global markets. The stock rally in the Nikkei and DAX started on October 30th. It may stretch credibility to try to tie a global stock market rally to a U.S. election that occurred several days later.

Vaccine Tantalizingly Close – Pfizer announced its COVID-19 vaccine has been over 90% effective in clinical trials and should be available by the end of the year. That assumes Operation Warp Speed’s FDA fast-track production remains in effect. Pfizer expects widespread availability of the vaccine in early 2021. 

From an economic perspective, it’s good news. Many industries, such as airlines, hotels, restaurants, movie theaters, and others are still only at 20% of their pre-pandemic-customer levels. Carnival Cruise Lines, as one example, rallied over 35% following the Pfizer announcement, while the broader market was up about 5%.

Notably, as you may expect, some “Stay at Home” stocks dropped on the news of a potential vaccine. Peloton and Zoom both fell around 20% as a result. If things go back to normal (or near normal), the demand for home exercise equipment and video conferencing services may drop.

Post-Election Rallies Are Normal – Dating back to 1980, almost every presidential election year follows a similar pattern: downtrends in the weeks leading to the election, and then a stock market rally following in November/December, after the election. 

Only President Bill Clinton’s first election in 1992 saw stocks lower in the two months after election day. Even then, the market was only down about 1%. All other elections have seen stocks rally in the weeks following the election, no matter which party won the White House. 

So this market reaction is perfectly normal. And we shouldn’t be surprised if markets continue to rise, on average, through the end of the year. Although, as pointed out before, you should never expect that to be in a straight line. 

One thing is for sure: After a very combative election year and after having been shut-in for months on end, it does feel as if investors are breathing a collective sigh of relief. We shall see how long that relief continues.

All the best,

Eoin Treacy