Key Questions: How Did Markets React to Events at the Capitol Building?

George Mateyo, Chief Investment Officer, January 2021

Key Questions: How Did Markets React to Events at the Capitol Building?

Optimism should be accepted and embraced. Those who do will be rewarded.

Most assuredly, there are people who are far more eloquent than I who can poetically capture the events that took place yesterday, January 6, 2021, in Washington, DC. There will be other people who possess much deeper knowledge of the inner workings of the US Constitution than I who can illuminate their longer-term implications. And there may be some who take exception to my comments below based on their own beliefs, understandings, and interpretations.

That being said, watching the US Capitol, "The People’s House," under siege by an angry mob, legislators being whisked away and hysteric confusion and destruction occurring within such a venerable place was simply stunning. Few could have pre-imagined such extreme images in my opinion.

Yet, when reverting back to "my lane" of contextualizing events and contemplating their implications for investors, I confess to being equally struck by the market’s response. In prior episodes of such upheaval, it would not be uncommon to see trading suspended, market volatility spike and investors freeze.

Yesterday, not only did trading operations remain open for the full day, but equities posted some healthy gains. Some shares surrendered some of their intra-day advances as the events in DC were first reported. But overall, stocks closed higher. Moreover, cyclical stocks (those tied more closely to the business cycle) outperformed, and small-cap stocks (also leveraged to the economy) outpaced their large-cap brethren. This suggests that, in general, investors remain optimistic about our economy.

Another takeaway from yesterday’s trading session is the fact that economic and corporate fundamentals take precedence over politics when it comes to stock prices, a point we have emphasized over the past several months. We base this assertion on the fact that the news that initially ignited yesterday’s rally was the outcome of the US Senate races in Georgia, proving once again that markets care little about which party wins the election but instead care more about the uncertainty of the election being removed.

More specifically, we now know that the Democrats control both the White House and Congress, albeit with the narrowest of margins in the case of the Senate. This means an easier path for additional fiscal stimulus — both in the form of stimulus payments directly to taxpayers and in the form of infrastructure spending — balanced against the possibility of modestly higher taxes. However, given the narrowness of the Democrats’ margin, larger-scale and more-sweeping changes are most likely off the table.

And while some may still worry over the specter of an increase in regulation affecting certain areas under a Biden/Harris administration, we still contend the bigger determinant on stock prices will be non-political in nature. These include the success of the vaccine rollout and the recovery in the US services sector, the speed with which employment recovers, continued accommodation from the Federal Reserve (i.e., keeping interest rates low), and the pace of the recovery of corporate profits. There are reasons for optimism for each one of these factors.

Similarly, we acknowledge there are political fissures beneath the surface that are rising up and capable of causing longer-lasting impacts if not addressed. We don’t want to overemphasize the price action of one trading day. But we saw things take place in our country yesterday that were previously unimaginable: The peaceful transfer of power, the foundational principle of our democracy, was interrupted by a crush of agitated protesters. Stocks, however, as one market observer succinctly noted, "barely budged" – a sign of optimism that we should happily accept and embrace.

Winston Churchill is credited with saying the following: "No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time."

Today, there are some who suggest another form of government should be tried. I contend, however, that our democracy will endure and optimists, once again, will be rewarded.

For more information, please contact your Key Private Bank Advisor.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

KeyBank does not provide legal advice.

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