With Biden in power, how is the stock market forecast looking?

Wall Street reached record highs on the Democrat’s first day as president

stock market forecast                                 

At first glance, the stock market forecast following Joe Biden’s inauguration appears to be optimistic – with US equities managing to hit record highs on the day he became president.

Here’s a snapshot of where major indices closed on Wednesday. The Dow wrapped things up at 31,188.38, the S&P 500 reached 3,851.84 and the tech-heavy Nasdaq Composite ended the trading session at 13,457.25.

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USA 500
Daily change
Low: 3940.9
High: 3983.8

But among those making stock market predictions, one big question is this: can Wall Street continue to enjoy impressive surges as 2021 continues, or are we heading for a “boiled frog” moment where overvalued equities will abruptly come crashing back down to Earth?

Stock market forecast 2021: the good news

The City’s enthusiasm for the 46th President of the United States can be linked to his determination to pass a $1.9trn stimulus package that’s designed to boost the economy. Given how the Democrats have managed to seal control of the Senate and the House of Representatives, Biden will face fewer roadblocks as he pursues his legislative agenda.

Stock market projections have also been based on the remarks of Janet Yellen, the former Federal Reserve chair who is Joe Biden’s pick for Treasury secretary. During confirmation hearings in Congress this week, she said extensive economic relief will help support small businesses, consumer spending and job growth. Yellen added:

“Economists don't always agree, but I think there is a consensus now: Without further action, we risk a longer, more painful recession now – and long-term scarring of the economy later.”

Even though Biden only has one day under his belt as president at the time of writing, he’s already managed to break stock market records. The S&P 500 has risen by 14.3 per cent from the day of his election to the inauguration – a period spanning 11 weeks. That’s the biggest surge in more than 90 years. And according to CMT’s Ryan Detrick, the 1.39 per cent boost to this flagship index seen on January 20 is the best inauguration day return since Ronald Reagan was elected for his second term in 1985. (On Donald Trump’s inauguration day four years ago, the S&P 500 rose by a more modest 0.34 per cent.)

Biden stock market forecast: the challenges

Many stock market predictions are based on the assumption that an aggressive rollout of coronavirus vaccines will eliminate the threat of the pandemic speedily – allowing the economy to return to normal. On this basis, earnings would quickly bounce back as people return to offices and restaurants, and book much-needed holidays.

Unfortunately, this analysis may be a little too simplistic for the complicated times in which we live. Scientists have warned that Covid-19 could remain a threat to some extent for years to come as new strains emerge, and restrictions may need to be reimposed next Christmas.

It will also take a while for some sectors to rebound from the devastating impact of this pandemic, especially the embattled aviation industry, which will likely have a much smaller footprint for years to come. A permanent shift to working from home for millions of people could have huge ramifications for companies based in city centres and let’s not forget that the recession sparked by Covid-19 may continue to dampen down consumer spending. An economic recovery isn’t a light switch that you can suddenly turn on. 

Stock market forecast for the next six months

Several investment banks have revised their stock market projections of late – and some believe that the S&P 500 could now find its way to 4,100 points by mid-2021.

Ed Keon, QMA’s chief investment strategist, was quoted by CNBC as saying:

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“Everybody expects a rebound in the second half. The question is how strong will it be. If you get a big stimulus package on top of the last stimulus package we got, that rebound could really be much stronger than expected.”

Looking even further ahead, Goldman Sachs believes that the S&P 500 index could hit 4,300 points at some point in 2021 – followed by 4,600 points in 2022.

Stock predictions are also being made for certain sectors – and there’s a belief that there will be some winners and losers in Biden’s presidency. The stock market forecast is looking especially rosy for the renewables sector given how the Democratic leader is planning to roll out ambitious green energy policies – signing an executive order to ensure the US re-joins the Paris Climate Accord on his first day in office. Some analysts fear that the upside may have already been priced into these stocks.

Other stock market projections warn there could be ramifications for dividends if Biden pursues a shake-up of taxation – meaning investors will pay higher rates on this income if they earn more than $1m in wages. We’ll have to wait and see how these policies pan out during the president’s first year in office.

Perhaps the most significant stock market predictions for 2021 concern the prospect of a de-escalation in trade tensions with other major economies. It’ll be interesting to see whether Biden’s inauguration takes the heat out of the current stand-off with China – something that could result in Trump-era tariffs being rolled back. An uptick in international trade would be exceedingly healthy for the stock market forecast – and it could also benefit ties with the EU.

Following Biden’s inauguration, European Commission President Ursula von der Leyen tweeted:

One final factor that could affect stock predictions going forward is Biden’s approach to tackling the coronavirus pandemic. While Donald Trump was often reluctant to introduce policies that may restrict individual freedoms, the new president has stated that he’s willing to adopt a tougher stance in order to bring infection rates down. As his inauguration took place, the US surpassed a grim milestone of 400,000 deaths as a result of Covid-19. If his new policies help to stop the spread of this pandemic, the short-term inconvenience could ultimately help the economy recover faster – the benefits of which will eventually wind its way to Wall Street.

With an ambitious agenda planned for his first 100 days, it’s going to be fascinating to see how the markets react to a new broom in the Oval Office. For the next four years at least, there’s a lot less chance of stocks surging and crashing as a result of a presidential tweet.

FURTHER READING: How to find good stocks

FURTHER READING: How to create a trading plan

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