The next few days will be truly historic, in every sense of the word. They will also be incredibly tense.
We know that Joe Biden will be sworn in as president of the United States on Wednesday. We know that Donald Trump will leave the office the same day under the dark cloud of a second impeachment.
What we don’t know is to what extent we will see incidents of riot and attempted insurrection across the country as the transfer of leadership takes place. Security everywhere will be tight, with Washington being compared to Baghdad’s Green Zone in terms of military presence. Everyone will be holding their breath if Mr. Biden goes ahead with an outdoor inauguration ceremony, as currently planned.
Oh yes, and all this while the world struggles with the worst pandemic in a century.
Amazingly, amid all this high drama, Wall Street continues to perform as if nothing out of the ordinary is happening. The Dow lost some ground on Friday but is still up 208 points for the month. The S&P 500 is marginally ahead for January by about 12 points. Here at home, the S&P/TSX Composite Index is up 475 points so far this year.
Even the Nasdaq has posted a slight gain so far in 2021, despite the pullback in some of the big tech stocks. Amazon.com Inc. is off 4.7 per cent for January, Apple Inc. has lost 4.2 per cent, and Netflix Inc. and Facebook Inc. have both given back 8 per cent.
But the tech pullback was to be expected after the huge run-ups we saw in 2020. The rest of the market keeps pushing ahead.
Why? In part, because investors are betting that Mr. Biden’s US$1.9-trillion stimulus package will help to kick-start the U.S. recovery. That is expected to really take hold in the second half of the year. And his plan, which will include billions to combat the coronavirus, provide emergency relief and expedite vaccine distribution, is just the beginning. A massive infrastructure program, the 21st-century version of Franklin Roosevelt’s New Deal, is waiting in the wings.
The market assumes these proposals will pass since the Democrats control both the House and the Senate. But the Senate margin is razor-thin (the tie-breaking vote of soon-to-be vice-president Kamala Harris), so nothing should be taken for granted.
The stock market also seems to be assuming that nothing will go seriously wrong in the next few days and weeks. The reality is that a lot of bad things could conceivably happen. I don’t have to spell them out; just check the nightly news. The small pullback we saw at week’s end may have been an indication of investor nervousness creeping in.
But the bottom line is that, absent some calamity, the path to recovery looks more encouraging than it has in some time. Markets will shrug off day-to-day headlines, as they did the Washington riot on Jan. 6, unless things get completely out of hand.
Assuming that doesn’t happen, stocks will continue to trade on the fundamentals – they’re all that really count in the end. If they hold as the quarterly results come in, 2021 should be a decent (but not spectacular) year for equities.
My advice remains unchanged. Take some profits if you have securities with large gains, always keeping the tax consequences in mind. Some readers seemed to interpret this suggestion last week as a signal to sell everything. It’s not. It’s simply being prudent in the circumstances.
The tech stocks, in particular, have had a huge run and may pull back more in the coming days. With the Democrats in control of Congress, there is going to be more pressure to investigate the alleged monopolistic practices of companies such as Amazon, Facebook, Alphabet Inc. etc., and legislation limiting future expansion or even forcing divestitures could follow. Reducing exposure in this situation simply makes sense.
And if the market does pull back, you’ll be glad to have some cash on hand to take advantage of discounted prices.
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