Our new quadrennial game seems to be arguing over credit when stocks surge after an election. How fun! In 2016, Donald Trump claimed responsibility for a rally that had begun in February, because the Standard & Poorâ€™s 500-stock index rose 5 percent in the month after his election. Weird as it may have been, the â€œTrump Bumpâ€ theory was born.
Schadenfreude is fair play: The S&P is up 10.9 percent since the day before the 2020 election. Sad! For Donald.
â€œTrump Bump,â€ meet the Biden Bull. Itâ€™s much, much bigger, as even Lilâ€™ Marco Rubio could attest. It also makes more sense, and should last longer.
Trumpian myth has held the billionaire-via-inheritance president out as a business savant: He encouraged the idea that he alone had fixed the stock market, never minding that it had tripled during President Barack Obamaâ€™s administration. Pay no attention to the fact that the S&P rose just 45 percent for Trump between his inauguration and this yearâ€™s election, complete with two bear markets (brief 20 percent declines) and a 10 percent correction in 26 months. â€œYour 401(k) will go to hell,â€ Trump warned on the campaign trail.Â
So, 45 percent gains with two bear marketsâ€™ worth of volatility is the benchmark Bidenâ€™s market must beat? Easy. Hereâ€™s why (and Iâ€™ll leave out the obvious one, which is that politics usually doesnâ€™t drive stock returns).
Firstly, the Biden Bull is happening amid a bad but improving economy. Donâ€™t tell Senate Republican Leader Mitch McConnell, or he wonâ€™t pass the bipartisan $900 billion stimulus package other Senators have assembled, including targeted help for the devastated restaurant sector and for state and local governments â€” which, combined, have shed 3.5 million of the 9.8 million net jobs lost since February. But the economy isnâ€™t looking structurally all that bad.
Yes, even a decent fourth quarter would leave economic growth negative for the year â€” and the 6.7 percent unemployment rate is far from enviable, especially with lower workforce participation. The 12 million people behind on their rent, according to Moodyâ€™s Analytics, are a huge, if solvable, problem.
But credit markets are functioning (unlike 2008â€™s financial crisis) and household income and balance sheets have improved. Existing home sales are up 15 percent from pre-pandemic levels. Car sales have almost recovered to their pre-pandemic sales pace of about 17 million units yearly, while in the last recession they dropped 30 percent-plus and stayed low until 2014.Â
The economyâ€™s needs are simple. Restaurants and stores have to be safe once vaccines arrive, and the government must keep restaurants, and their workers, solvent until customers return. And schools (the biggest part of state and local government employment) must be propped up until theyâ€™re safe. A second round of universal payments like the $1,200 per person in last springâ€™s economic package would be helpful, but less essential than the enhanced unemployment insurance in the compromise Senate bill.
This year, Trump son-in-law Jared Kushner was mocked for saying the economy would be sailing by summertime. Next year, itâ€™ll happen, unless McConnell blocks new stimulus â€” which he is threatening to do, both directly and by proposing a non-serious alternative bill that leaves out aid to states and expanded unemployment insurance.
But why will the Biden Bump happen nevertheless? Because Bidenâ€™s pro-growth policies lean into the future. The longest-running Trump joke is that every week is Infrastructure Week, when the president will propose far-reaching investment in roads, schools and other assets â€” but is foiled by the latest twist in the Russia investigation. Again and again.
Unlike Trump, Biden will actually have Infrastructure Week. Economists understood Trumponomics in 2016: Moodyâ€™s Analytics said the $1.4 trillion tax cut would pump growth, a little, before protectionist trade policy offset the benefits. Thatâ€™s what happened, because the infrastructure plan never emerged.
Today, Moodyâ€™s says Bidenâ€™s plan will add 7 million more jobs than Trumpâ€™s second-term platform â€” led by infrastructure spending, especially the president-electâ€™s climate package. Thatâ€™s $1.7 trillion worth of electric vehicle charging stations, building retrofits for energy efficiency and help for electric vehicles.
That kind of stimulus wonâ€™t peter out in three quarters like Trumpâ€™s tax cut.
And the Biden Bull isnâ€™t based on settling political scores. If you profited in stocks under Trump, you likely did best in industries and companies the president feuded with. Itâ€™s why he deserves no credit for them, or broad market gains.
Amazon has quadrupled since 2016, driving the S&P â€” Trumpâ€™s contribution was depriving Amazon of a $10 billion Pentagon cloud-computing contract because CEO Jeff Bezos owns The Washington Post. Facebook (which the administration asked a court on Wednesday to break into two companies, because Trump is butthurt about some of his backersâ€™ disinformation finally being blocked), Apple, Google, even Crowdstrike (the California computer security company Trump thought helped Ukraine hack 2016â€™s election for Hillary Clinton), helped tech stocks double while Trumpâ€™s favored sectors crumbled.
Trump did zero for cloud computing or video streaming: Instead he promoted fossil fuel companies that cratered (energy stocks in the S&P 500 have dropped by half, the worst of 11 S&P-designated sectors). Real estate companies that got tax windfalls are down, too. The rest of the market has beaten financial stocks, which once were supposed to benefit from Trumpâ€™s relaxed anti-fraud rules,12-fold since late 2017.
But who really counted on Trump to grasp that Wall Street crime doesnâ€™t pay?
The Biden Bull will be based on rising corporate profits, stemming from a bigger, more energy-efficient economy that, if the new president can muster Senate votes for his plans, should also see slower healthcare cost expansion and more investment in education, childcare and other long-term growth stimulants.
The potential flaw in the Biden Bull is that the S&P 500 is trading at 22 times next yearâ€™s estimated earnings of index companies, CFRA Research investment strategist Sam Stovall said. Thatâ€™s much higher than normal.
But low interest rates, which prop up stock multiples, are likely to persist. Also, earnings estimates early in expansions are often too low, holding out the chance â€” not certainty â€” that 2021 profits will be higher than expected.
If this turns out to be wrong, Iâ€™ll blame valuations. Or McConnell, if he reprises his post-2008 mantra that heâ€™d rather see the country fail than a Democratic president succeed. But it would be better for America if McConnell lets the Biden Bull stampede.