Post-Election Market Reaction

Since the beginning of the week, the S&P 500 Index, which tracks the largest U.S. companies, gained 8%.  Bond yields fell from a recent high on the ten-year yield from 0.94% to 0.78%.

With the election process still ongoing, many are wondering, "How can the market be up so much?"

It is always difficult to pinpoint "the" reason for short-term market moves.  This is especially true in such a fluid situation.

Here is our take.

First, Republicans likely retaining control of the Senate means that it is unlikely corporate tax rates will rise from 20% to 28% any time soon.  This means higher earnings for companies rather than the potential tax hit that was feared.

Second, under a Republican Senate, personal income tax rates along with capital gains taxes will not be going up.  It was feared that investors would rotate out of technology stocks as they look to take gains in 2020, instead of next year when tax rates may have gone up.  This selling pressure has been averted.

Third, interest rates will continue to stay lower for longer.  This means stocks are relatively more attractive than bonds, so an increase in the stock market's valuation is warranted. A huge fiscal spending bill that may cause an increase in inflation is less likely with a split government.

As of this writing, we still do not know who won enough votes in the Electoral College.  The risk for markets of a contested election process remains.

In addition, there is still vote counting for the Senate, along with the potential for run-off races.  These districts may not know who won the Senate until early January, and thus we may not know which party controls the Senate until then.

We stand ready to rebalance portfolios into undervalued assets should attractive price levels occur.  We also may need to trim positions that continue to move above the portfolio targets.

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