Why the Stock Market Rallied After the 2020 US Election: Vaccine Hopes and Gridlocked Government

The episode analyzes the paradoxical stock market rally following the contentious 2020 US election, despite political uncertainty, a global pandemic, and President-elect Biden's proposed corporate tax hikes. It challenges initial assumptions that investors would fear uncertainty, instead exploring why markets soared to new record levels. The podcast first revisits previously discussed factors like quantitative easing and low interest rates, noting their diminished impact compared to earlier in the year, and highlights the reduced perception of the US as a safe haven for international investors due to domestic turbulence and a weakening dollar.

The core arguments for the rally center on two major developments. First, Pfizer's announcement of a highly effective COVID-19 vaccine trial provided a significant glimmer of hope for a return to normalcy, boosting the long-term fundamentals of businesses severely impacted by the pandemic. However, the podcast cautions against over-excitement due to bureaucratic hurdles in medicine, while acknowledging that even the *hope* of good news can trigger a "bandwagon bias" among investors. Second, and perhaps more crucially, the election outcome resulted in a mixed government, with neither party controlling the House, Senate, and Presidency.

This political gridlock is presented as a boon for investors, as it creates policy stability. Biden's proposed tax increases are unlikely to pass a Republican-controlled Senate, and Republican efforts to cut welfare or lower taxes further would face resistance in the Democratic-controlled House. This stalemate means businesses can operate under existing rules without fear of sudden, major policy shifts, allowing for more predictable long-term growth projections. This scenario offers investors "the best of both worlds": retaining the pro-business tax cuts from the Trump administration's Tax Cuts and Jobs Act of 2017, combined with the prospect of improved international trade relations under Biden's foreign policy approach.

The episode concludes by emphasizing that the market's reaction is less about favoring one political party and more about the perceived stability and certainty that a gridlocked government provides. It notes the historical pro-business impact of the Trump administration's fiscal policies but also highlights concerns over trade tensions. The rally ultimately reflects the confidence of wealthy investors in a future with stable policy and a potential return to global economic health, even if the benefits don't immediately translate to the average citizen. The market, often seen as a barometer of "rich people's emotions," signals optimism, leaving the broader population to hope for trickle-down benefits.

"if investors are supposed to fear uncertainty surely they would be terrified of the current world that we live in"

"logic would dictate that the best outcome for the major corporations that make up financial markets would have been a nice simple and decisive republican victory"

"people don't have anywhere to keep their cash other than in the stock market where even if they only get a four or five percent return it's better than the zero percent that they would get in a bank"

"america is no longer that same safe house it was for international investors"

"sometimes just the glimmer of hope is enough for investors to think that other investors are going to get into the market and so they get into the market to try and beat out those other investors and so on and so forth until the type of reaction you would expect from good news is achieved even if the good news wasn't that great"

"the bandwagon bias means that people will look at the money they stand to make jump in safe in the comfort that there will be some greater fool following along"

"investors love one thing above all else and that is certainty"

"the election gave investors a much bigger gift than you might expect a mixed government"

"this pushes government policy changes into a bit of a stalemate which is fantastic for investors"

"the market can remain irrational longer than rational investors can remain solvent"

"people often joke that the stock market is just a chart of rich people's emotions and as funny as that may sound it's absolutely true"