Stocks have generally seemed untroubled by Washington’s change of administration; indeed, they hardly seem to have noticed. True, Joe Biden has threatened to raise taxes, an action that markets never like. He has also said he will regulate more aggressively than his predecessor, and that also is something that tends to hurt stock pricing. But such intentions are not yet real actions, and they won’t be for some time, especially if they need enabling legislation. So for the time being, investors are willing to take a wait-and-see approach. Meanwhile, despite the storming of the Capitol and the continued violence in Seattle and Portland, there is greater hope of relative political and social calm, and that is something markets like.
To better understand this relatively optimistic view, it is necessary to realize that people as investors do not have political opinions. They do as individuals, of course, and some of their opinions are very powerful. But they know that successful investing — their decisions to buy and sell — requires them to put aside their political and social biases. They know that whether they favor the left, the right, the center, or even a revolution, what markets favor is calm and, most of all, predictability. Except in times of panic or extreme enthusiasm, most investors proceed according to what they understand of typical market reactions, whatever they as citizens may want for the nation’s politics.
With this context in mind, here are three points to illustrate how markets have digested recent news:
- Donald Trump gave markets lower taxes, especially on corporations, and less intrusive regulations, and investors liked these. President Biden has said he will raise taxes on corporations and on high-income earners, and that he will pursue more aggressive regulations. Neither of these actions would sit well with markets, but they are a way off from being reality, which they might never see, especially if the change requires legislation, given that the Democrats have the slimmest of majorities in both houses of Congress.
- Trump had become the fulcrum for much disruption in Washington and in the streets. Because all of it threatened business activity and profits, investors, whatever their political sympathies, did not like it. Trump’s departure from the White House promises less disruption, though the January attack on the Capitol and the continuing violence in Portland and Seattle may argue otherwise.
- Strangely enough, the protests from the right and the continuing (and even anti-Biden) protests on the west coast offer investors some comfort. Earlier in 2020, the Democratic Party’s unwillingness to condemn street violence, vandalism, and theft added a troubling element to the investment picture. But though investors as individuals might deplore police misconduct, the movement to “defund the police” threatened investment objectives. With violent protest aimed at Democratic as well as Republican leadership, investors have reason to expect that police defunding may lose support and that the authorities will seek to restore order more energetically.
None of this should be read as an attempt to characterize investor sympathies, whether as individuals or as a class. Despite media and Hollywood stereotypes, investors are as varied a group as any other: large or small, they can lean left, right, or otherwise. Though individual or groups of investors might be willing to sacrifice a good investment environment to achieve specific social or political goals, when they’re actively in the market they act according to what might produce price gains or losses, and that is the perspective I have offered here.