Volatility is always present in the stock market, but it's been an exceptionally wild year for Wall Street in 2020. The unprecedented coronavirus disease 2019 (COVID-19) pandemic sent the iconic Dow Jones Industrial Average (^DJI 0.08%) screaming lower by as much as 35% in a span of just 33 calendar days. Although the Dow has regained much of what it lost during the pandemic swoon, the 124-year-old index is still down about 1% on the year, as of this past weekend.
But there is potential good news. With major news networks and the Associated Press announcing former vice president and Democratic Party challenger Joe Biden as the president-elect on Nov. 7, a path has been paved for the market's oldest stock index to march higher.
How high, you ask? There's a very real chance that we could be talking about Dow 40,000 under a Biden presidency. Here are five reasons for investors to be incredibly bullish on the Dow Jones moving forward.
1. Low interest rates will fuel growth
First of all, no matter who won the election, Federal Reserve Chair Jerome Powell made clear that the nation's central bank had no intention of raising its key federal funds target rate before 2024. The Fed remains concerned about the pace and sustainability of the current economic recovery, especially with COVID-19 cases hitting record highs on a daily basis.
Although the Fed doesn't directly control interest rates, its ability to set the overnight lending rate that banks charge one another does work its way into the U.S. economy and influence interest rates. The Fed's desire to keep interest rates low suggests there'll be ample borrowing capacity available to high-growth businesses.
2. Another round of fiscal stimulus is likely
Even without a Democrat majority in the Senate (a runoff in early January will concretely determine which party controls the Senate), there's a very good chance we'll see another round of fiscal stimulus passed by a Biden White House.
As some of you might recall, the initial second stimulus package proposals from the Democrat-led House and Republican-led Senate came in at $3.5 trillion and $1 trillion, respectively. In the months that followed, the House proposal shrunk to $2.2 trillion, while the White House stepped in and offered a $1.8 trillion proposal. When Biden enters the White House on Jan. 20 -- assuming President Trump doesn't orchestrate a stimulus deal before then -- he'll have to bridge a much smaller monetary gap than the initial proposals, which should be doable.
If another round of stimulus is passed, it'll be a relief for small businesses, and it may even provide a healthy bump up in consumption.
3. A Senate GOP majority would make corporate tax changes unlikely
Depending on the January Senate runoffs in Georgia, a Republican majority in the Senate would create a split Congress. Just as we've seen for the past two years, Democrats would retain control of the House, and the GOP would hold the Senate.
As I've suggested, there's a good chance we'll see a stimulus bill passed, as well as normal fiscal spending bills to keep the government running. However, virtually all of Biden's big-picture campaign proposals would probably be off the table with a split Congress. Chief among them is the plan to increase the peak marginal corporate tax rate back to 28% from 21%.
Donald Trump's flagship Tax Cuts and Jobs Act slashed the peak corporate tax rate from 35% to a roughly eight-decade low of 21%. If Biden were able to pass his tax proposal and lift the peak marginal rate back to 28%, corporate earnings would fall by about 10%. But with Biden's plan unlikely to become law, businesses can expect a few more years of historically low tax rates and pumped-up profits.
4. Operating earnings tend to expand over time
Fourthly, history is on the side of long-term investors. Over time, the operating earnings of great companies usually expand, which is what pushes stock valuations higher. The Dow Jones is comprised of 30 well-known, time-tested, multinational companies that have a rich history of profitability. They're the type of companies investors don't have to worry about when they go to bed at night.
Over the trailing 35 years, the Dow Jones Industrial Average has returned an average of 8.96% per year, not including dividends paid. If the Dow simply stuck to this average return rate with Biden as president, it would take the index to 40,000.
Understandably, the stock market doesn't always follow its historic averages. But with fiscal stimulus and low interest rates likely, there's ample reason to be bullish about the Dow moving forward.
5. The Dow is proactively packed with winners
Finally, investors should understand that the Dow Jones is a price-weighted index that's been changed more than 50 times since inception. Though some of these changes have to do with acquisitions, it's far likelier that a Dow stock is removed from the index because of a low share price and poor performance.
For example, after years of poor or mediocre performance, oil giant ExxonMobil and Big Pharma Pfizer were removed from the iconic index in August. With the Dow being price-weighted, both companies had grown to have very little sway within the index. Thus, over time, S&P Dow Jones Indices has packed the Dow with companies primed to outperform.
It might sound like a long shot, but Dow 40,000 is very much possible under a Biden presidency.