PPeople who undoubtedly consume propaganda, on whatever side of the political divide, are probably very confused right now. On the one hand, if you bought into the idea that Joe Biden and Kamala Harris were socialists, committed to overthrowing the American way of life and bent on taxing America to death and punishing success, how do you explain you a stock market that has done this since their election in November, hitting an all-time high on inauguration day?
On the other hand, if you think Biden is going to be the savior of the planet by destroying the oil industry, how do you explain crude oil prices doing that during the same period?
Or a chart for energy stocks, represented by the sector ETF (XLE), that has looked like this since early November?
This apparent anomaly is because while propaganda may sound great to willing listeners, the reality is another story.
The market is strong as, in the long term, the economy is still recovering from the Great Recession and, in the short term, from pandemic-related shutdowns. It’s strong because the Fed is handing out cash to invest and keeping interest rates low, and it’s strong because Congress reached an agreement on handing out borrowed money to offset the economic impact of the pandemic, keeping demand for goods afloat.
Oil and other commodities are strong as supply is still down after the cuts when demand slumped during the shutdown, but that demand, both domestically and internationally, is recovering quickly.
For oil, no matter what Biden might say or do, we are still many years away from a world where the commodity is irrelevant. The Paris Climate Agreement is a gesture – important for sure – but what we have really signed is a list of goals, hopes and dreams. Even the cancellation of Keystone XL will have less impact than some predict. It’s a blow for Canadian producers (Canadian Prime Minister Trudeau was therefore one of the first to criticize the decision), but it will have little impact on the American oil industry. It remains to be seen what political changes, if any, will occur to make those Paris Climate Accord dreams achievable and how future oil infrastructure decisions will impact the company, but the story of Big Oil’s influence on legislation, from both Democrats and Republicans, indicates that any real change will only be at the margins.
The evolution of America’s trade relationship, particularly with China, will be much more influential on commodity prices, including oil, in the first year or so of the Biden administration. Assuming the markets are free again, optimism around global growth will increase and prices may continue to rise.
So, to answer the question posed in the title, “How long will the Biden Bump last?” — we must first decide when reality will change, regardless of partisan tropes about what will happen. When will the Fed change course? When will Congress start raising taxes and cutting stimulus spending? When will the supply of raw materials catch up with, or even exceed, the growing demand?
At present, the Fed seems unlikely to change course anytime soon. They have made several attempts to tighten monetary policy over the past few years, but each time they have been thwarted by circumstances, market reaction, or both.
Congress is another matter altogether. The sort of bipartisanship that has enabled stimulus packages so far won’t last, and even if Democrats control both houses of Congress, the wafer-thin majority in the Senate could prove problematic before long. This will embolden the left of the party, and it will only take a moderate to feel they have gone too far for any future stimulus package to fail.
The outlook for commodities is better. It’s all about expectations and assumptions, so changes that can be made quickly, like lowering fares, can have an immediate upside effect.
The problem that all markets face is that at these levels, assets are priced to go well. This means that any setback will cause a negative reaction, and the odds are in favor of a setback at some point this year. Vaccinations are coming, but Covid cases continue to rise at an alarming rate. Unemployment is soaring again. More stimulus will be needed, but Republicans will now shift from the traditional Dick Cheney “deficits don’t matter” stance on debt when in control, to the fiscal conservatism they suddenly adopt when they find themselves out of power.
The Biden bump we’re seeing can certainly last a few more months, if for no other reason it has anything to do with Biden, just like the “Trump bump” had nothing to do with Trump. However, a correction is long overdue and there are things to come in a few months that could trigger one, so investors might want to start trimming some positions and taking profits before too long.
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