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A Celebration of the Status Quo

Needless to say, this week was all about the election.  I’m sure there was company specific news, but it was drowned out by the tsunami of coverage of this historic election.  While we still don’t know its outcome, and may not know for a day or two more, it seems now that Vice President Biden holds the lead by a small margin.  At the same time, it appears that Republicans will retain control of the Senate.  I know this outcome won't make some of you happy, but I’m not here to talk politics.  My aim is to discuss how this election might affect the economy and by extension the stock market.  We’ve caught a small glimpse of that this week.

In four of the last five days, the market has moved to the upside in a big way. Monday +423, Tuesday +555, Wednesday +367, Thursday +543, and today’s small loss. What this says is that the markets are not simply complacent about the outcome, but downright thrilled with the prospect of a divided government. While I’ve heard for several decades now that gridlock is good, I have not always embraced that philosophy. However, in our current politically polarized environment, the status quo may be just what the economy ordered. Let me explain.

Coming into the election, a not insignificant number of investors were concerned with the strong likelihood of increased income and capital gains taxes, higher corporate taxes, and a continuation of the ballooning national debt. A divided government means the probability of that happening under a Biden presidency is strongly diminished. Furthermore, speculation suggests that a Biden presidency will be more moderate than if the Democrats controlled both the Executive and Legislative branches. The President is going to be required to work with Republicans in the Senate which means anything being proposed will necessarily be more moderate. Additionally, President Biden’s cabinet, which must be approved by the Senate, will likely be filled with more moderate Democrats. At the end of the day, many of the fears of a progressive agenda have faded away and with that the stock market rejoiced. Again, I understand some of you will be very unhappy with the politics of the situation.

We can expect the economic recovery to slowly improve over the coming year, deficit spending to decrease, and easy monetary policy to continue (if not ramp up). I do expect there will be another stimulus package either later this year, or perhaps more likely in January, albeit smaller than had previously been proposed. That’s not to say there won’t be changes coming. There will almost certainly be a re-regulation of various industries and actions by executive order, as has been the case these past twelve years. It is also likely we could hear increased calls for regulating the technology sector, specifically with an eye to social media, and perhaps even bipartisan moves to break up some of the biggest tech companies. Having said that, the good news is that from a market perspective, status quo is a good thing and we expect a lot of status quo going forward.

As for company news, unrelated to the election, we have Dunkin Donuts which is being taken private by the same consortium that owns Buffalo Wild Wings, Arby’s, Sonic, and Jimmy Johns. Walmart decided to drop plans to use roving robots to scan shelves. I guess we can consider that a win for the humans and a loss for the robot overlords. Alibaba took a big hit after the Chinese government went against the company’s plans to spin off its Ant Financial Group, in what would have been a $40 billion IPO. The IPO was oversubscribed by some $3 trillion. Uber and Lyft won big victories in California, with Californians overwhelmingly voting in favor of a ballot measure exempting drivers from being classified as employees. And perhaps the biggest winner on election day was illicit drugs. Four more states legalized marijuana, leading to increased speculation in the cannabis stocks that are publicly traded.

In closing, I return to a story of the week that I hope you find interesting.  You no doubt have heard, or perhaps noticed, that over time couples tend to start to look alike.  The question of why has intrigued psychologists for years.  Until recently, the observation has never been scientifically confirmed or refuted.  A study conducted in 1987 at the University of Michigan concluded that couples’ faces became more alike as their marriages went on, with the effect being greater the happier they were.  However, the latest study out of Stanford University finds no such effect.  Instead, it found that people tend to choose partners with similar features to themselves.  While I suppose the science is still out on this age-old question, it may be that people seek out similar-looking partners, just as they look for partners with matching values and personalities.  Now you know.

Bruce J. Mason, MBA