Unmasked

Unmasked.  Stocks rallied strongly yesterday on news of the President’s improving health, more economic stimulus, and yes, Biden’s strength in the polls. Positive economic numbers were overshadowed by more positive news from the political arena, and upbeat news is, alas… a good thing.

N O T E W O R T H Y

Come one, come all. Yesterday’s market action was confusing to many traders who were left asking: “how is this good?”  First it is important to note that traders didn’t seem too concerned about the President’s initial announcement that he had contracted COVID with the Dow falling only 134 points on Friday. And a lot happened since Friday’s close.  The President was sent to the hospital and we were treated to a series of highly conflicting stories about his condition.  Many traders were braced for a difficult day yesterday… but it wasn’t to be. First, the final narrative on the President’s health was positive as he took a joyride on Sunday and announced that he was seeking to be released as early as Monday night…which he was.  Good news. Though the odds seemed stacked against it, House Dems continue to work with Treasury Secretary Mnuchin on a stimulus package.  I suppose the fact that they are still talking is positive and many are hopeful that something good may come out of the discussion. Finally, the polls and the betting lines are showing that Joe Biden has widened his lead over the President, though some have not yet factored in the President’s illness, which can affect them. This is where things get a bit murky.  People are asking how a win by Joe Biden can be considered a good thing for the markets, as it is commonly thought that Republicans are more friendly to business.  Well, first things first, while the former statement may be true, the stock market has historically told a different story, as I outlined in last week’s note that a Republican president does not yield greater stock returns than a Democratic one, even if the party controls the legislative branch as well (see my note here:  https://www.siebert.com/blog/index.php/2020/09/30/hang-in-there/).  There is another thing, and this is not the first time I have written this:  these times are, indeed unique.  Remember that markets factor in all known information, good and bad.  For the markets, unknowns are far more unsettling than even bad knowns, and unknown has become the name of the game. The three big unknowns faced by the markets are 1) when will the virus be contained, 2) will the economy continue to recover and 3) will the election results be questioned.  Regarding unknown No. 1, we are edging closer to getting some results from the numerous, ongoing vaccine trials. Additionally, the President’s apparent rapid recovery underscores the positive potential for therapies currently experimentally offered by Regeneron (REGN) and Gilead (GILD).  On the unknown on the economic recovery (unknown No. 2), it is clear that while the US economy has been improving, a second wave of pain is emerging as stimulus from the initial CARES Act fades.  Many of the large beneficiaries of the initial stimulus have warned that a new wave of layoffs are imminent if there is no further funding.  Many small businesses, that make up the bulk of the economy, are shutting their doors permanently.  Yelp! has reported that it estimates that 40,000 bars and restaurants have closed since March.  It is clear that in order to sustain the economic recovery, more fiscal stimulus will be needed.  Despite the fever pitch of political rhetoric in recent weeks, House democrats have been negotiating with the White House on a new package.  Though both sides still appear to be far apart, many believe that the President will be more amenable to a deal in light of his recent slip in the polls.  I suppose we can put that unknown close to the positive column, but not squarely into it. Finally, there is unknown No. 3. Biden’s rating and betting odds have been on the rise for some time and they picked up considerably after last week's raucous debate.  With Biden’s lead margin widening, many believe that if the election results are not close, it will be less likely to be contested, which is top of mind for investors as we head into the final days before the big day. Further, a Biden win and a potential Democratic sweep significantly increase the chances for a massive amount of stimulus, as Democrats are thought to favor more Government stimulus. Given the recent surge in Biden’s polling and odds, traders are factoring in better chances for bigger stimulus and a lower likelihood of a contested election. So for now, three big unknowns facing the markets appear to be a bit more well… known, which probably explains yesterday’s bullish sentiment.  A word of caution however, things can change quickly in the weeks ahead.  A stimulus package is still not yet agreed upon and the Senate seems heavily focused on the battle over the next Supreme Court nominee. Finally, while Biden’s lead is bigger than Clinton’s was at this point in the last election, Trump was able to significantly narrow the gap in the final weeks.  And if you weren’t paying attention, Trump won the last election.

THE MARKETS

Stocks rallied yesterday on news of the President’s health, hopes for a stimulus, and encouraging economic data.  The S&P500 rose by +1.80%, the Dow Jones Industrial Average climbed by +1.68%, the Russell 2000 Index surged by +2.77%, and the Nasdaq Composite Index advanced by +2.32%.  Bonds slipped and 10-year yields rose by +8 basis points to 0.78%.

NXT UP

- JOLTS Job Openings (Aug) is expected to come in at 6.5 million, down slightly from last month’s 6.618 million openings.

- Fed Chairman Powell will speak at NABE conference this morning. Additional Fed speakers include Harker, Bostic, and Kaplan.

- Paychex will announced earnings before the market and Levi Strauss will announce after the bell.

daily chartbook 2020-10-06