The U.S. stock market continues to push to new highs two months ahead of the U.S. Presidential election. As the race becomes tighter, the market correlation with one of the candidates will increase.
Back in 2016, when Hillary Clinton and Donald Trump fought for the White House, the stock market correlated with Hillary. On an average poll suggesting she will win, the stock market rallied. Every time when the polls suggested that the gap between the two shrank, the market corrected.
And that lasted all the way until the election day. Right after, the stock market rallied like never before. Who won? Donald Trump.
The moral to this story is that no trading day is like the other, just like no business cycle is like the previous one. Many view the stock market as being too high – but this is an election year. What if this is just the start of an even bigger rally?
Traditional Financial Analysis Challenged to the Core
Technical and fundamental investors try desperately to find an argument for the current rally. After all, according to all traditional metrics, the rally does not make sense.
How is it possible for the Nasdaq100 index to rally 40% in a pandemic year? Most economies and cities in the world were on the lockdown, businesses shut down faster than during the 2008-2009 Great Financial Crisis, and the road ahead is full of uncertainty. Moreover, millions of Americans and even more people outside of the United States are jobless. Wasn’t the stock market supposed to reflect the economic reality?
As always, the answer lies somewhere in the middle. It is difficult to pick an extreme view because the market changes as humankind changes. And, often, the market incorporates future expectations way faster than we like to admit them.
Huge amounts of money are available to the people. Savings rates reached record highs – what’s the point spending on consumer goods when we don’t know what the future brings? The population is reluctant. Working from home is trending.
Spending more time online increased exposure to financial market news. Moreover, a new wave of brokerage houses target the younger generations. Nowadays, with as little as $1, you can invest in the U.S. stock market via fractional shares. Own just a slice of the pie!
What I’m trying to say is that the market reflects a new reality. If we remain anchored in the previous one, the danger is that we miss the opportunities ahead.