Wall Street's reaction to Washington mayhem? All-time highs
If the day pro-Trump protesters turned violent and stormed the Capitol Building ultimately goes down as a stain on U.S. history, Wall Street seemed to take little notice.
Stocks rose Wednesday as the riot was unfolding and continued to ascend into record terrain on Thursday. Three leading indexes — the S&P 500, blue-chip Dow and tech-heavy Nasdaq — all closed Thursday at all-time highs. The Nasdaq composite topped 13,000 points for the first time, or about two and a half times its peak during the dotcom bubble in the 1990s.
The stocks surge also defied predictions, including by President Donald Trump, that the market would tumble if Democrats won control of the White House and both chambers of Congress. Others have predicted that markets would slide, arguing that investors are underpricing the economic carnage caused by the coronavirus.
Wall Street strategists take a different view. They expect the economy not only to recover in 2021, but to thrive once much of the population is vaccinated against COVID-19 and pent-up consumer and business demand begins to pop. Top economists at Goldman Sachs upped their estimate for growth in 2021 to 6.4% — that would be the first time in more than three and a half decades that economic activity grew at least 5%. (GDP hit 7.3% in 1984.)
Georgia on their mind
The COVID-19 vaccine rollout, while slow, is a major factor fueling investors' optimism. Analysts assume that mass inoculation will stop the pandemic in its tracks and a greater sense of safety among Americans will lead to a surge in spending by consumers and businesses later this year.
A more immediate catalyst: The surprise victories of Democrats Jon Ossoff and Raphael Warnock in this week's two Georgia Senate seats election. Michelle Meyer, Bank of America's top U.S. economist, predicted that the working majority for Democrats in Congress would open the door to another $1 trillion stimulus package aimed at speeding the recovery.
Meyer predicted the next round of stimulus, which she called a "game changer," would include $2,000 checks for individuals, an extension of enhanced unemployment insurance, and billions in financial aid for cash-strapped state and local governments.
At the same time, many analysts think the narrow margins for Democrats in the House and Senate will defuse any broad effort to raise taxes, a notoriously heavy lift in Congress even in the best of times.
"The new administration may push for higher taxes, but we think any hike would be more limited in scope than either the Democratic Party platform or Biden's own plan," Mark Haefele, the chief investment strategist of UBS, wrote in a note to clients on Thursday.
Staring down history
Historically, political turmoil in the U.S. has left few lasting scars on financial markets. Stocks rose nearly 50% in a little more than a year after President Richard Nixon resigned in August 1974 following the Watergate scandal. In the year after Bill Clinton's 1998 impeachment, the market rose nearly 40%. And in early 2020, stocks sailed right through Mr. Trump's impeachment proceedings, cratering only when it became clear that COVID-19 would slam the economy.
Although it may strike some as bizarre, this week's turmoil in Washington, D.C., may be seen as a positive on Wall Street. After all, what matters most to investors are interest rates and corporate profits. Both appear to be going in the right directions — that is, lower for rates and higher for profits.
Noted Wall Street strategist Edward Yardeni predicts that the aggressive cost-cutting — including mass layoffs — that many companies did last year amid the pandemic would lead to strong profits this year as business rebounds. "The lower costs combined with the surprising resurgence in some businesses has resulted in much better bottom-line growth in the second half of 2020 than most anyone expected last spring," Yardeni said in a note to investors.
What national debt?
Some argue that soaring government spending and a rising national debt will lead to a spike in interest rates and, ultimately, financial ruin. But a modest rise on Wednesday in the 10-year Treasury yield — which represents the interest rate the U.S. must pay to borrowers — suggests investors aren't sweating the ballooning debt.
Although scenes of rioters running rampant in the Capitol were disturbing, in other words, they're unlikely to deter investors from lending their money to the federal government.
"In markets, there was only one relevant question for both elections: Will there be, in order of importance, more monetary and fiscal stimulus?," Scott Knapp, chief market strategist at CUNA Mutual Group, said in an email to CBS MoneyWatch. "The answer was a resounding yes after both elections, so the response was the same."