Wall Street Seems to Like the Election Result. Why Is That?

While the results are still pending some final counting, it seems likely at this writing that former Vice President Joe Biden will be the 46th president of the United States.

Over the past few days, despite the chaos of the voting and seemingly endless counting, stocks generally went up.

Do investors love Biden? Hate Donald Trump? Nothing of the sort.

Remember Warren Buffett’s dictum on stock prices, which he learned from his mentor Benjamin Graham. In the short run, Buffett says, stocks are a voting machine. In the long run, they are a weighing machine.

What he’s saying is that one should discount any expectation of a huge upswing or huge downswing in the value of the stock market based on fraught political events, natural disasters and even wars.

Yes, investors will “vote” stocks up or down in the short run. And what we seem to have coming in the short to medium term is divided government.

The Republicans seem likely to maintain control of the Senate. The Democrats likely will keep the House and take the presidency.

What that means for investors is that any change that might be coming from Washington isn’t likely to be coming all at once, like a thunderbolt. On balance, that’s a good thing for investors. It gives companies more time to adjust to changes and stay profitable if possible.

But do remember the weighing machine. As new policies are introduced there will be winners and losers as usual. Nevertheless, the value of any given stock will be judged over the long term.

Time horizon

This is not to say stocks can’t go down next week or next month. It’s just to say that the immediate drama of the U.S. elections, however overwhelming it might feel to voters, is quickly becoming the past.

What happens next — in terms of potential stimulus spending, a vaccine for the pandemic, the recovery underway elsewhere in the world (or, more lockdowns) — these are the things that will drive investors toward or away from risk in the short term.

Voting and weighing. Over the long run, data show, stocks tend to rise in value. Not all stocks, obviously, but as an asset class stocks typically offer a return on your investment, especially if your time horizon is long enough.

The stock market really isn’t geared to the day-to-day drama of events, political or not. It’s geared to the long-run profitability of companies. The fortunes of those companies are geared to economic growth, which is tied to the demographics of a given country or region of the world.

In short, it’s a fool’s game to ascribe the direction of the stock to the headlines of the day, even in retrospect. You’re usually better off owning assets over years and decades and letting the market do the weighing work for you.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.