President Trump once said, “the stock market does whatever the stock market wants to do.” Still, that didn’t stop him from claiming that his policies resulted in the ~75% growth in the S&P 500, following his election.
The ‘Trump Bump’ got a lot of attention, but it’s worth noting that we’ve seen a nice ‘Biden Bump’ in the year following his election, too. The S&P 500 is up +25% since the election in November 2020.
Most of the predictions I made in my Election Day 2020 post have largely come true: 1) Wall Street loves increased government spending; 2) inflation has become an issue; and, 3) very little that has happened in Washington DC has impacted me personally.
Related: Election 2020: Where Are We At?
I have to say that +25% stock market growth is a lot more than I would have expected in Year 2 of the global pandemic. The Schiller S&P 500 PE multiple, which I thought was too high pre-pandemic at 30x is now pushing 40x. That’s a worrisome number as we head toward 2022.
We are due to receive a big payout from a real estate loan soon and I’ll have to think about where it goes. I prefer it somewhere a lot less risky than the stock market right now. While I am happy to see the impact of the “Biden Bump” on our investment account balances, I’m feeling we are due for a big letdown, soon.
How are you thinking about the sustainability of the “Biden Bump” in stock market prices?
Image Credit: Associated Press
MrFireStation 
You may not think the policies have affected you but they have.
Communism looks great for the first 5 years you are blind.
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Please be specific, Rick… Which specific Biden policies do you think have had a significant impact on me (or wil)? Which have affected you?
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I am on the last full day of a Mexican Riviera Cruise. At 59 (me) and 66(wife), we are on the younger end of the age spectrum of passengers. Most of the passengers have cruised a lot and this is pent up demand. Hearing conversations, most have more money than they can spend and thus the “Biden Bump” or stock market in general is meaningless. I heard anger from one passenger concerning property tax, but he then conceded that he inherited that paid off 30 unit apartment building two decades ago.
We have too many people at the lower end of the economic spectrum, but many of us have far more than we can ever spend.
Everything in life reaches an equilibrium. We will return to historical averages of 7-10% returns in the market. People will cry as it will feel like going from 70mph to 45mph. The next five years we will see the greatest number of people claiming social security benefits ever as the biggest birth years were 1957-63. Then we will see the impact of the sixties baby bust. If you think employers have a tough time finding workers today, just wait. And forget about skilled nursing facilities. We will also see an increasing amount of wealth transition to young people as more wealthy parents and grandparents pass than ever before
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Yes, I agree with much of what you are seeing. I do think the market will have to regress to the mean over the next five years. At the same time the demographics look a bit frightening when it comes to social security. At the same time, we need to remember that the stock markets valuation is driven more by innovation than anything else. And, there is no doubt that we are living in an amazing age of new technologies which are revolutionizing entire industries. I don’t think the stock market still justifies its current valuation, but who knows?
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I got bugged by the drop in a small company stock called AMGEN in October 1987. I now admit that my net worth at the time would say that I had no business owning single stocks. AMGEN was early on the biotech stock of the future and if I had held on….. the point is that I learned a lot from that experience and all in all the lesson didn’t cost that much.
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October 1987 was a bad time for a lot of stocks!
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I agree that we will be regressing to the mean of 7 to 9% returns.
Here are some numbers from Ned Davis Research. For the period 1972 to 2013 dividend growers had an average annual return of 10.07%. The entire dividend paying universe returned 9.28%. Non-dividend paying stocks rose just 2.34%. I remember seeing that dividend cutters actually had negative returns.
Going into an investment I look at the current yield, the dividend growth rate and the probability that the dividend will continue growing. My expected return is the yield plus the dividend growth rate. In 2010, I could pick up stocks such as Home Depot that had a 4.5% current yield and raised its dividend around 20% for the next 10 years. Microsoft was also available with 4.5% yield and a little over 10% dividend raise.
Today, about the best you will see is 4% yield and 4% growth, which is in alignment with your 7 to 9% return. It is important to look at the income and its growth rate while ruling out any stocks that have a history of dividend cutting.
During times when prices are down, you will actually see your income grow faster because your dividends will be getting reinvested at higher current yields. When the good times come back and prices are high, you can harvest capital gains and put the money back to work in something that offers a higher combination of current yield and growth rate.
For this to work, stay away from dividend cutters. Look back and see how investments you are considering performed in the 2008 to 2010 timeframe and also during 2020.
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Klaus, I am going to give you the award for the most diligent and logical investor among anyone who reads this blog. You should start your own mutual fund! You could charge us a 1% fee to manage our money! 😉
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Chief, Thank you for the kinds words. The style of investing that I do is really old fashioned and boring, because I am investing for an income stream consisting of dividends that are growing. If you go back in time, a lot of people used to invest in stocks exclusively to develop an income stream that they could retire on. If you recall as recently as the early 90s, stock trades cost a couple hundred dollars each, compared to today where trades are almost free. People used to buy and hold and participated in DRIP (dividend reinvestment plans) to save transactional costs. Here is what most people don’t remember about DRIP. In order to participate, you had to have your shares registered in you own name instead of the street name (the broker’s name) and actually held stock certificates in your possession similar to your Packer’s certificate. This caused the stockholders to think of themselves as partial holders in a business instead of as flippers of abstract financial instruments.
Owning shares and holding the certificates created a stable class of shareholders who attended annual share holder meetings. Holding the shares in your own possession also greatly slowed down the ability to sell shares, because you had to deliver them to your broker to sell. The Twin Cities Area for its size has a disproportionately large representation of large, stable, and successful companies which are the types of companies that are a good fit for dividend investors. If you went to annual meetings of most of the companies you worked for as recently as the early 90s, you will see a lot of local people in attendance.
My own Grandfather retired at age 50 on dividends mostly from utility and bank stocks from the Pittsburgh area. One of his joys was taking car trips throughout the country and he wanted me to travel with him and drive when I was a 16 years old. I can hear him now when we were driving through Texas in the 70s, when the speed limit was 55, “Keep the car under 80, you want to fit in and not get singled out for a ticket.” The point is he had plenty of money and could afford to put us up in hotels and eat at nice restaurants for months. He lived to be 96 and didn’t outlive his money like many people.
Personally I am earning around 4.57% currently yield and it grows around 4.3% per year. Doesn’t this look remarkedly close to the high side of the long term normal return for the market? A really cool facet of this income is that most of the income comes from qualified dividends which are very lightly taxed. My son’s who are just starting out pay 0% and I pay 15% Federal Income Tax on Qualified Dividends.
Here are the downsides. You will not beat the market and will actually underperform the market during the times like the past two years. At the end of 2020, I asked my three sons who I am teaching, “Do you really think the average US company is 18.5% better off than they were at the start of the year?” Some of their friends have made some large returns dabbling in crypto currencies and stock options.
This was a good time to lay one of my favorite Warren Buffett sayings on them, “You find out who isn’t wearing a swimsuit when the tide goes out.” The point is your friends are doing great not because they suddenly came up with some great new strategy. They are doing great because of the irrational exuberance in the market. Wait and see what happens when the market goes down.
Here is another big downside; do not expect to be popular at parties. If you talked about your stocks, people will think you are uncool or even a cretin for owning nasty old oil stocks, big pharma, utilities, and consumer addictive products (cigs). Of course they stop to fill up their tank on the way home.
So here is what the Mutual Fund would look like. The 1% Management Fee would drag down the return from 8.87% to 7.87%. You would own a bunch of companies that are not cool and will sometimes even get people mad at you, despite the fact that they need and still use their products. When you hit a time when the market is going down the other participants will panic and sell their mutual fund shares instead of letting me reinvest their dividends at a higher current yield which will drive up their overall yield faster. So instead of being able to take advantage of panic buys, I would have to become a panic seller myself.
This will be a further drag on performance. That is the Open Fund Structure I just described to you. The same would not happen in a Closed Fund, because you would not be forced to sell holdings to redeem shares that are being sold.
I would like to end with another favorite quote from Sir John Templeton, who despite being Knighted later in life grew up humble in Tennessee, “To be a good investor you need to help people. When someone wants to sell a stock really badly, you need to help them by buying it. When someone wants to buy your stock really badly, you need to help them by selling to them.”
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I’ll bet your grandfather passed on quite a bit of wisdom on those trips beyond his to avoid speeding tickets. Your slow and steady wins the investment race approach would make him proud, I’m sure. A retirement from 50 to 96 is something we would all aspire to, isn’t it?
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I decided to apologize in advance for my long response…but I hope it may help at least one person.
I suspect the “Biden Bump” is the result of a primarily artificial infusion of high expectations of the coming massive government spending. The Trump bump seemed to be driven by a combination of significant deregulation, lower taxes, and (yes…still way too high) government spending. The combined effect has been awesome for everyone’s portfolios, but the resulting high P/E foreshadows a new cycle in the market along with the ever growing inflation factor that is sneaking up on all of us. Unfortunately, we just don’t have a crystal ball telling us exactly when that new cycle is coming, so it’s important to develop your own personal investment plan (PIP), so you don’t over-react to these temporary shifts in the market(s).
Admittedly, I’m a conservative investor. My investment strategy has always had a significant tilt (60%) toward hard assets (ie. real estate), so that likely says something entirely different about my own personal investing views, regardless of the recent bumps. With that said, we manage our other (40%) market related investments in significantly less hands on manner (favoring low cost index funds), that has certainly enjoyed the recent bumps.
To manage our fears (and exuberance), we manage our market investments with a dynamic allocation strategy, so as we approached our retirement and our sequence of return risk (SORR) years, we shifted to a more conservative market portfolio of 60/40 (equity/bond&cash) allocation. As the Shilling P/E continued to skew upward from the mean, we again dynamically shifted down (10% more) on our equity position (50/50) several years ago. I continue to rebalance accordingly, but this puts us in a situation of only having a 50% equity exposure in our market investments (and only having an overall portfolio equity exposure of ~20% when considered in combination with our Real Estate investments…so yes, extremely conservative at this time…which is good given our personal risk tolerance). Once the P/E reverts, we will dynamically shift a small percentage (up to 10%) back toward more equities. Longer term (post SORR), we will gradually increase our equity glide path.
Why am I sharing so much detail? Because the recent bumps should be irrelevant with a good PIP. So while both the Trump and Biden bumps have given us more growth than we ever imagined gaining during our first five years of early retirement, we will continue to stay the course. And when the market corrects (and it will), we will simply rebalance as per our own personal investment plan. I’ve been down this path at least 4 times during my investing career, and every potential down cycle can make you cringe. Many younger readers probably haven’t lived through a serious down cycle yet. But a P/E of +25 was a yellow flag for us, so at +40…it’s a definite red flag for me. Bottom line, just develop your own PIP and relieve the stress, and the bumps (and dumps) will smooth out your ride.
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Thanks for sharing, Thom – I agree that those seem to be the major government influences on the market, but at the same time, the digital innovations that are reshaping markets deserve some of the credit and are sustainable.
I like your PIP and have less formally followed a similar approach. I dialed up our cash last year before the election and will likely keep a conservative profile until corporate profits grow into their current valuation or stock prices tumble.
We are in no hurry to withdraw anything from the market, so we’ll be hopeful some things will sort themselves out over the next 3-5-7 years.
You are right that younger people are going to “cringe” when they see a big market pull back. I will probably cringe too – although we are well-buffered for such a storm.
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We all cringe or we’re only fooling ourselves… 😉 But hopefully we will all cringe less and react effectively with a good plans in place. So many younger investors are played by the negatives in the media. I always emphasize having good PIP’s to assist when the fan gets hit.
You are absolutely right on the digital innovations that have reshaped the markets. I certainly did not touch on that sufficiently. There are definitely significant impacts on that front that have greatly affected the market and subsequently the PE. Let’s hope those corporate profits reach those high valuations. I’m very optimistic on businesses, obviously a less so on most governmental interventions. 😉
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Yes, I’d businesses innovate. Government just moves money around. 😉
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I tell people that government takes money out of your right pocket, shaves quite a bit off the top for themselves and then gives you a fraction back in your left pocket, at best. Government does not invent or manufacture anything, and yet six of the ten wealthiest counties in the country are clustered around Washington D.C.
As an example, Robert L. Woodson (1989) calculated that, on average, 70 cents of each dollar budgeted for government assistance goes not to the poor, but to the members of the welfare bureaucracy and others serving the poor. He further attributed the well paid bureaucracy to being the reason that the problems they are supposed to be addressing do not improve. If they fixed problems, they would be out their well paid job.
Recently members in Congress have expressed concern about their personal safety. We should build a wall around the Washington D.C. area telling them it is for safety. When it is done, we can then let them in on the joke that the wall was erected to turn Washington D.C. into a penal colony, to protect the rest of the country from Washington D.C.
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I knew the bureaucracy exists to support itself, but 70% is a huge number. I’m going to have to look up Mr. Woodson. I don’t doubt that figure – I wish more knew it!
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I first heard Robert Woodson speak when he was interviewed by Marc Levin. Mr. Woodson is a community organizer who is trying to lead a revival in the Black community. Drive change at the local level instead of top down at the national level.
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That seems like the right approach!
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