Biden stock markets start with 3 main headings

Stock markets have performed well under President Trump with the S&P 500 increasing 57.5% between the day he was elected in 2016 to November 3, 2020, when he lost to President Joe Biden. The increase is driven by a combination of higher earnings and higher valuations assigned to them.

For the stock markets to see another four years of strong growth there are at least three major headlines to overcome. These include employment growth, the Fed not only maintaining its balance but contributing substantially and stocks at high valuation rates.

Benefits were aided by tax cuts

Trump and Republicans were able to pass a tax bill that cut the corporate tax rate from 35% to 21%. This costly earned earnings as can be seen in the chart below as they jumped from 2017 to 2018, the first year they were in operation. Over the four years Trump in office employment had risen 27.1% over four years.

• Earnings 2017: $ 133.61
• Earnings 2021: $ 169.83, up 27.1%

Employment growth should be growing during the Biden Administration but they will not get much help from tax cuts. From a financial perspective the best outcome is the rate to stay as it is and there is potential for it to increase as Biden talks about moving to a 28% corporation tax rate.

The Fed has pumped up the markets

The Federal Reserve has pumped more than $ 3 trillion into the economy, and in fact the financial markets, in just four months from February to June this year. This is the only playbook he used during the Great Depression.

Think of it this way. The Fed buys bonds, which means the owners of those bonds now have money. The owners, or investors, want or need to reinvest the money. Because interest rates are so low (because the Fed has a high demand for bonds, which raises their prices and reduces the interest rates that bonds pay) most of the -investment received ($ 3 trillion) going into stocks.

At the time of the Great Recession, the Fed increased its balance by about $ 1.4 trillion in three months. While it fell half a trillion dollars in two months, it reversed course and essentially brought it back to the higher level a few months later.

• September 2008: $ 900 billion
• December 2008: $ 2.3 trillion
• February 2009: $ 1.8 trillion
• May 2009: $ 2.2 trillion

Over the next five years to July 2014 the Fed doubled its balance sheet size to $ 4.4 trillion and essentially remained at that level for nearly four years until March 2018. The Fed then sought to reduce some and got down to $ 3.8 trillion by August 2019.

• July 2014 to March 2018: $ 4.4 trillion
• August 2019: $ 3.8 trillion

However, it reversed a course rising to a level that was then to a low or $ 400 billion by February 2020. As the coronavirus began to adversely affect the economy and shut down significantly, the Fed jumped in and bought $ 3 trillion in assets during the spring.

• February 2020: $ 4.2 trillion
• June 2020: $ 7.2 trillion
• July 2020: $ 6.9 trillion
• December 2020: $ 7.4 trillion

Hopefully the Fed will be able to buy medium but if successful in this endeavor it will take away a huge accelerator to the stock markets. If you wanted to look for the main reason that stocks have moved higher in 2020 it is due to the purchase of Fed funds.

Stocks have gone up faster than earnings

In the four years from December 31, 2016, to December 31, 2020, the S&P 500 rose 67.8%. However, employment has grown by only 27.1%. With the upward movement in the stock markets outperforming employment growth the PE S&P 500 number has risen from 16.5x when Trump was currently elected to 22.1x.

With stocks trading at higher valuation levels it could be difficult for stocks under Biden’s tenure to outperform Trump, even though it was in the first two months since Biden was elected that the stock market has been do better than when Trump was first elected.