It’s officially a blue wave. What this historically means for stocks

In November, markets surged after Joe Biden became the winner of an all-time presidential contest – even as Democrats did not gain as much ground in Congress as some had expected.

At the time, market prognosticators were excited about the prospect of a divided Congress (where Republicans retained control of the Senate) because, historically, the the stock market tends to perform better under divided government. According to LPL financial data, stocks rose more than 17% on average under a divided Congress, while markets typically traded nearly 11% higher under a Congress controlled by Democrats.

But in a surprising turn of events, Democrats managed to turn both Georgia Senate seats blue on Wednesday“And take control of an equally divided Senate. Given Democrats’ control over the House and the White House as well, the markets eventually got the so-called blue wave scenario, narrow as it is.

For some street watchers, the recent market reaction: to strike all time highs“Could be a head scraper. “There seems to have been a lot of apprehension about the blue wave – and we didn’t quite get the blue wave, if you will. But clearly based on yesterday’s results in Georgia, Democrats control all three houses. That, in theory, was supposed to be bad news, but what’s interesting… is that history doesn’t really back it up, ”said Randy Frederick, vice president of trading and derivatives at Charles Schwab. Fortune.

“If you look at the story,” Frederick adds, “the markets did well in a totally blue scenario.”

Indeed, Ryan Detrick of the LPL points out that the markets have only been lower once in the past six years when the government (including the White House) was completely controlled by the Democrats, and the returns of the market ” [don’t] looks like something out of the ordinary. On average, the S&P 500 has returned around 9% in such scenarios since the 1950s.

Yet this blue sweep in 2021 in particular will likely be accompanied by some early stock market stimulus, namely, more stimulus.

“On the upside, the economy was rocked by $ 900 [billion] recovery, and another round is likely given that Raphael Warnock and Jon Ossoff’s victories in Georgia have tipped the Senate towards a Democratic majority, ” Bank of America wrote in a report Thursday. “We believe that another stimulus plan could be adopted in the neighborhood of $ 1 [trillion]. ”

Additionally, BofA economists say that if there was another $ 1 trillion stimulus passed in February, it could “easily” add another basis point to the bank’s 2021 GDP estimate, ” leaving the economy to flirt with a growth of 6% in 2021 ”.

And it seems it is these hopes for a revival, in part, that are driving the markets.

Indeed, stocks are already in shambles in the first full trading week of 2021. (Frederick de Schwab, for his part, believes the markets “are turning to potentially less divisive government. [and] more economic stimulus, which seems likely in the future. “) Despite a tumultuous Wednesday that saw a pro-Trump crowd descend on Capitol Hill in an unsuccessful attempt to stop President-elect Biden’s certification, stocks have reached all-time highs. And on Thursday, the Dow Jones closed up about 0.7%, while the S&P 500 gained nearly 1.5%, both to historic highs.

Regardless of who holds power on Capitol Hill, people like Frederick argue that “staying invested for the long haul is by far the best way forward.”

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