The effects of 10 months of pandemic followed by a politically inspired riot on U.S. Capitol grounds in the last weeks of a presidential term would ordinarily torpedo the stock market.
But the Dow Jones Industrial Average (DJIA), S&P 500 and other indexes have not only stayed strong, they have also hit record highs during in the first days of 2021.
Karen McGrath, Bucknell University professor of finance, attributed the strength in times usually riddled with uncertainty to 401(k) retirement plan money coming back into the market, the aftermath of “window dressing” by portfolio managers and moves to buy stocks after times when the market dips lower.
In spite of disturbing headlines, McGrath said uncertainty over politics and other fundamentals may indeed be heading for resolution.
“Whereas the whole thing in D.C. would have normally been really disruptive, you’ve had it tempered by the elections in Georgia,” McGrath said. “Before we didn’t know if the Senate was going to be Republican controlled or Democratic controlled. And now we do.”
McGrath observed strength in areas perceived as favorable in a Biden administration such as tech stocks, electric vehicles, “green” companies and fuel cell technology companies. A more general rise can be attributed to the return of 401(k) money, which is usually distributed throughout the market via “passive” funds.
“While there was massive uncertainty, I think people saw that as a ‘one-off’ situation,” McGrath said. “Now, whether it is nor not, we don’t know. But we have the general certainty that Biden was going to be certified.”
McGrath called tech stocks “fan favorites” giving strength to the market. Optimism over economic stimulus checks has also helped, albeit only in the short term. Two-income families making a little less than $140,000 annually perceive the stimulus checks as a windfall if both members are still working.
McGrath said increases of riskier speculative buying may be something for all to be wary of. Similarly, only people with true expertise in the market should engage in futures and options trading.
Meantime, Pat Polwitoon, associate professor of finance and analytics in Susquehanna University’s Sigmund Weis School of Business, attributed the current market to monetary policies in place for more than a decade.
“It is not just the U.S., it is all over the world,” Polwitoon said. “Right now, with Democrat control (we) will get easier money policy. The stock market loves that.”
While a new administration may not be able to force the Federal Reserve to do anything, Polwitoon said “the Fed” has usually been compliant. A weaker dollar, he added, may permit people to buy more stocks.
However, domestic inflation may be something to watch.
“What drives that is that we ‘print’ money like crazy,” Polwitoon said. “It can drive inflation.”
The stock market, Polwitoon said, is projecting better times ahead. It should be enjoyed until inflation starts to creep into the picture. He added that corporate earnings for the first quarter of 2021 will also likely be higher and drive the market.
Polwitoon concurred that the tech sector will continue to grow as indicated by strength in the tech-heavy NASDAQ index.
The market took a breather for a time on Friday after a negative employment report, with the DJIA retreating about 0.38% in midday trading.