Stock Market on Best Election Day to Inauguration Run Since World War II

Following a year of records the U.S. would rather forget, the stock market is about to set one that bodes well for the economic future—the best Election-to-Inauguration Day run for a first-term president since World War II.

Sam Stovall, chief investment strategist at CFRA in New York and author of The Seven Rules of Wall Street, said the S&P 500 gained 11.8% from Nov. 3, 2020, Election Day, through Jan. 15.

The market rose 8.8% after John F. Kennedy's election, 6.3% before Dwight D. Eisenhower took office and 6.2% in anticipation of Donald Trump's move to the White House, he said.

However, the index declined 19.9% after President Barack Obama's election, 6.2% before George H.W. Bush was sworn in and 1.4% before Richard Nixon took office.

Stock Market
Trader on the floor of The New York Stock Exchange GETTY IMAGES

There may be a brief pullback before another surge, Stovall said.

"We think the S&P 500 is overdue for a digestion of gains that could push the index value below its 2020 closing level," Stovall said in a research report. "However, we think it will be set early enough in the year to allow for time to recoup all losses and go on to set even higher highs."

The gains spread across all sectors, he said.

"All sizes and styles within the S&P Composite 1500, along with 10 of 11 sectors, rose in price since Election Day," Stovall said. "In addition, 95% of the 147 sub-industries advanced, posting gains in excess of 60% for the top eight, versus no more than single-digit declines for the bottom eight."

But now comes the hard part, he said.

McConnell Schumer
U.S. Senate Majority Leader Mitch McConnell (L) (R-KY) looks on with U.S. Senate Minority Leader Chuck Schumer (L) in the House Chamber during a reconvening of a joint session of Congress on January 06, 2021 in Washington, DC. Drew Angerer/Getty

"The next test will be Mr. Biden's ability to get the Republicans to go along with his plan," Stovall said.

Analysts at Goldman Sachs believe that will be difficult, and the size of Biden's proposed economic package is likely to be reduced to gain needed votes.

President-Elect Joe Biden's proposed COVID-19 relief plan will cost an estimated $1.9 trillion, or about 8.6% of Gross Domestic Product (the value of all goods and services produced in a year).

While it is possible that congressional Democrats might find a way to do this, it looks more likely that the need to find bipartisan support might constrain the size of the package.
- Goldman Sachs research report

Goldman Sachs doesn't expect Congress to approve all elements of the plan, but instead expect a package ranging from $750 billion, or about 3.4% of GDP, to $1.1 trillion, or about 5% of GDP.

Democrats have said they hope to pass the bill on regular order, a move that would require at least 10 Republican votes—and conservatives are unlikely to approve such a large measure, analysts say.

"While Democratic leaders might use the budget reconciliation process to circumvent potential Republican opposition," Goldman Sachs said in a research report, "there are two arguments against doing this.

"First, recent political events put a greater premium on finding areas of bipartisan support, if possible. Second, the reconciliation process has never been used before to pass discretionary spending, and it appears that around half of the proposal—state fiscal aid, education grants, public health spending, to name a few areas—falls into this category."

In the end, Goldman Sachs said, it will take bipartisanship to pass a new stimulus package.

"While it is possible that congressional Democrats might find a way to do this," they said, "it looks more likely that the need to find bipartisan support might constrain the size of the package."

Nevertheless, Goldman Sachs expects Congress to approve about $1.1 trillion in additional fiscal support.

The economic downturn that resulted from efforts to contain the spread of COVID-19 pounded the economy, leading to the largest single-year contraction of the nation's GDP since the Great Depression of the 1930s.

Nevertheless, the S&P 500 finished the year up about 15%, and Nasdaq was up about 40% for 2020.

The U.S. Federal Reserve, the nation's central bank, hasn't mandated lending, but its aggressive buying of corporate bonds on the open market last year as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act —to the tune of $250 billion—backstopped companies and their employees.

Federal Reserve Bank
A gold plated seal outside inside the Eccles Building, the place of the Board of Governors of the Federal Reserve System and of the Federal Open Market Committee, May 19, 2016 in Washington, DC Brooks Kraft/Getty

The Fed's intervention worked. The economy grew at an annualized rate of 33.4% in the third quarter of 2020, the U.S. Commerce Department reported.

"I think the stock market will continue to go higher, perhaps much higher," Zach Abraham, chief investment officer of Bulwark Capital Management, said in a report.

"The only two times we've had valuations anywhere close to this were in 1929, when the markets dropped 85% over the next two years, and 1999, when the Nasdaq dropped 85% over the next two years," he said. "I don't think a selloff that dramatic is going to happen again because of the underwriting by the Fed and the US government."

Last year, the Fed's action and stimulus spending approved by Congress injected about $8 trillion into the economy," Abraham said. "The amount of cash that's been poured into this market is mind-boggling."

But to be clear, it's the Fed that's driving the market, he said.

"If the Fed continues to do that, stocks will keep going up. If it stops doing that, they won't," Abraham said. " All that money injected into the system last year had to go somewhere. Part of it ran headlong into a stock mania that had been 13 years in the making, since the financial crisis of 2007-2008. It's just gone ballistic."

However, the job market remains weak.

Last week, the U.S. Bureau of Labor Statistics (BLS) pegged the unemployment rate at 6.7% compared with 3.5% in February before the pandemic hit. Analysts at S&P Global Ratings in New York expect hiring to increase once economic restrictions are eased and the coronavirus vaccine reaches a significant number of people.

A woman wearing a facemask enters a building where the Employment Development Department has its offices in Los Angeles, California on May 4, 2020, past a posted sign mentioning the closure of the public access counters in the office due to the coronavirus pandemic. Frederic J. Brown/AFP

But there are 9.8 million fewer jobs now than prior to the pandemic, and the 22 million jobs lost in March and April last year won't be regained until at least 2023, experts say.

Beth Ann Bovino, U.S. Chief Economist at S&P Global Ratings, called the jobs report "alarming," and said there may be further job losses in January.

"It's a wakeup call, making it clear that the jobs market is far from healed," she said in a report.

"Given the resurgence in COVID-19, we expected initial jobless claims would likely near the 1 million mark, but it came much sooner than we thought," she said. "The speed in which it neared that milestone is disturbing for both the people who lost their jobs and the outlook for the job market overall. There is more of a risk the situation gets a little worse before it gets better."

The savings rate increased during the shutdown and many hunkered down. But there appears to be pent-up demand in many sectors, including travel, hotels and restaurants, that will boost the economy when restrictions are lifted and civic life returns to something closer to normal.

Consumer spending represents about two-thirds of the U.S. economy.

The concern is that unemployed workers don't spend beyond the basics and those who held their jobs during the downturn, especially white-collar employees who can work from home, will continue to sit on growing savings accounts.