Market Predictions for a New Administration
Updated: Jan 30
Joe Biden was sworn into office this week. A new administration coming into power brings change, and we are going to be able to see these changes represented in market performance. Obviously, we will see a change in the American economy as the new administration adjusts budgets, changes tax codes, creates laws, and implements policy. With the new administration, I am predicting we are going to see a very strong economy over the next couple of years.
What Metrics am I using?
First, it is important I clarify what metrics I’ll be considering. For the scope of this argument, I am going to be looking at specifically the S&P 500 and the Dow Jones Industrial Average as my indexes. I think it is worth mentioning that these indexes are not good indicators of an economy as a whole, because they don’t represent the majority of the public. We have seen this clearly during a pandemic where we have the highest unemployment numbers since the great depression and many working-class people are being evicted yet the S&P is at a record high. However, because I am writing this for a markets and trading class, I’m choosing to focus specifically on how the new administration and current events will impact the market, not whether or not those changes are good for the public.
How the Market is Responding to Biden
In order to predict the future we must look at the past and the present. Over the next 4 years, I expect both the Dow and the S&P to perform very well. Historically both indexes have performed much better under Democrats. The highest percentage gain for both indexes were under Clinton and Obama, and the worst years were under W. Bush and Nixon. Furthermore, the market is also responding favorably to Dems currently. The day Biden won: Dow grew 830 points, Dems won the Senate, Dow grew 440 points to a new record high, Biden results were certified: Dow grew 250 points to a new record, Biden sworn into office: Dow grew 270 points. This is a clear signal that the market is responding favorably to the new administration.
In recent years, Keynesian economics is used by both Democrats and Republicans. Although republicans still platform on platitudes of “free market” and “Laissez-faire”, their policy speaks a different story. Keynesian economics revolves around government spending. Simply put, the more government spending, the higher the GDP. The higher the GDP, the better the stock market performs. This isn’t exactly how it works, but you can’t deny there is a strong correlation between GDP and market performance.
In the past, Republicans implemented things like conservative economic theory and trickle-down economics ( or “Reaganomics”), however, Trump showed that they have abandoned that as a party, having the largest deficit in history (even excluding the massive coronavirus stimulus deals). As a result, their fiscal and monetary policy in recent years has been incredibly similar. Also, both parties have become massively corporatist. Looking at the two most recent market crashes, Obama in 2008 and Trump in 2020, both parties choose to give HUGE corporate bailouts to bolster the stock market.
While I would argue this is bad for the American people, and the party as a whole there is no denying it results in massive market growth. So as Democrats take control I expect to see government spending on social programs, infrastructure, green energy, and coronavirus stimulus, and I expect that to translate to the same level of market growth we have grown accustomed to under Obama and Trump.
What Sectors to Look Out For
Where they differ will be in which sectors see the most growth. I expect less military and defense spending and more infrastructure and clean energy spending. I also don’t think it is a stretch to assume weed will be legalized on the federal level with Democrats now controlling the senate. I will probably buy and hold marijuana stock. In countries that have legal weed, we have seen it become a billion-dollar industry. Currently, the weed that can be sold in the US is only at the state and local level, and because it is illegal on the federal level it can’t be shipped.
With these restrictions gone, I expect to see absolutely massive growth in this sector. I also would be long on green energy. If we listen to science, in the next 10 years we are going to have to make massive changes to our energy sector. Biden has made it clear he is going to be pumping a lot of taxpayer money into green energy and I am going to be long on that. And even though I expect military spending to go down I am going to hold this sector. One sector I will be shorting is oil. Globally we have to move away from oil. It is a dying industry. Not to mention I expect more strict coronavirus regulations under Biden, and we saw in April how hard this affects oil futures.
In summation here is what I predict for the next 6, 12, 18, and 24 months. In the next 6 months, I expect coronavirus, not the transition of power, to be the main factor impacting market performance. I think initially with more strict regulations there might be some lack of consumer confidence that will cause market growth to stagnate. However, with the Fed begging for more stimulus money for the American people to spend, I think there will be enough government spending to keep the market growing.
In the next 12 months, as the globe begins to open up again, I expect to see a lot of renegotiations on trade policy. Foreign leaders will need to meet and discuss opening up travel. Many world leaders have directly expressed their dislike of Trump, and Biden already has working relationships with many world leaders. For this reason, I expect more favorable trade negotiations.
With how fast the world changes, I don’t feel confident in any predictions going out 18-24 months, however, assuming we don’t have another global catastrophe, because Democrats control the house, the senate, and the presidency, I expect this administration will be able to pass a budget with the spending they need for energy reform. More government spending means a higher GDP and I expect that to translate directly to the DJIA.