Low Visibility

Low visibility.  Stocks ran up once again as voters took to the ballot box.  Investors are hoping that the economy will get back on its feet soon… no matter who ultimately wins what.

N O T E W O R T H Y

Exhausted, exasperated… the battle rages on.  If you are reading this with your first cup of coffee, you have surely already checked your phone to learn that we still have no conclusive results from yesterday’s Presidential election.  That puts us firmly in what I have been calling Scenario 3: no clear winner.  Let’s go through all of the stuff that happened WHILE YOU SLEPT, because I didn’t.  First, we have to look at market behavior over the last 2 sessions which included the S&P rising by +1.23% on Monday and +1.78% on Tuesday.  On Monday, the odds appeared to be in favor of a Biden win with a toss up in the Senate.  The clearest response to those projections appeared to be a rise in treasury yields, gains in the industrial sector, and the outperformance of small caps.  Bond yields have been rising in anticipation of a big fiscal stimulus package which would not only get the economy back on track but also accelerate inflation.  A Democratic sweep would mean a bigger package, faster… according to that thesis. The Industrial sector rose by +5.6% in the past two sessions, which is also a sign that investors are banking on a stronger economy, cyclically speaking. Monday’ strong ISM Manufacturing number, which beat expectations, can also be credited with the sector’s gains. Finally, small cap stocks have outpaced the large caps in the past two sessions.  As reported here, that has been a growing trend, which was underscored in the past two sessions.  Recall that small caps are a close representation of the real economy and stock performance amongst them tends to mirror the health of the economy.  More stimulus, quicker, and an ailing economy is what we refer to as reflation, which is what traders appear to be placing bets on.  If you followed the markets overnight you would find further evidence that traders were banking on a blue wave.  Early in the evening when it became clear that Trump would win Florida, initial gains in the market faded.  A Florida win by Biden would have meant that a clear victory would be known early.  Still the market remained positive even as results of some of the Democratic hopeful states began to be called in favor of President Trump.  By the early hours, it became clear that the election was close… really close, and a victory for either side would be determined by a few battleground states which have a large number of mail-in ballots to process.  In other words, we may not know the victor for some time. Interestingly, the market seemed to remain upbeat… but then came the nightmare scenario.  President Trump claimed victory even before all the votes were counted and threatened to go to the supreme court.  That sent stocks spiraling to their lows of the night. But those weren’t the only developments of the night.  The race for control of the Senate was tight, according to the polls.  As early results began to roll in, hopes for a Democratic majority began to fade pointing two more years of a split Congress.  In other words, stimulus may not be so big and may not come so fast.   Remember those treasury yields that were so closely tied to stimulus?  After an initial pop, they dropped throughout the night. Thirty-year yields are down by nearly -20 basis points from their evening highs.  So that reflation trade which has been so prominent over the past two sessions appears to be unraveling as election results begin to pour in, removing the surety which was enjoyed by traders over the past two sessions.  We may not know the final topography of the Executive and Legislative branches for days to come.  We do know the topography of the Judicial branch, and if that branch has to get involved, all bets are off.  Regardless of the ultimate results of the former two, whether the same or slightly changed, a stimulus package is still likely to be enacted at some point, and the economy will ultimately regain its strength, and a strong economy is good for stocks, no matter what color the wave is that got it there. Volatility will be the name of the game until the final results are clear, which will hopefully be soon.

THE MARKETS

Stocks ran up for a second straight day as investors appeared to be optimistic that the election, no matter what the results, would usher in better times.  The S&P500 rose by +1.78%, the Dow Jones Industrial Average climbed by +2.06%, the Russell 2000 Index jumped by +2.91%, and the Nasdaq Composite Index advanced by +1.85%.  Bonds slipped and 10-year treasury yields gained +5 basis to 0.89%.

NXT UP

- ADP Employment Change (Oct) is expected to show that +650k private sector jobs were added, slightly lower than last month’s +749k additions.

- Markit Services PMI (Oct) is expected to be on par with earlier estimates at 56.0.

- ISM Services Index (Oct) may come in at 57.5, slightly lower than last month’s 57.8.

- This morning Hilton and Vertiv missed estimates.  After the closing bell, we will get releases from Marathon, Albemarle, CF Industries, Qualcomm, Energy Transfer LP, Expedia, GoDaddy, Apache, Pioneer Natural Resources, Century Link, MetLife, Host Hotels, Hologic, Qorvo, Allstate, Fitbit, Equitable, Genworth, Paycom, and Zinga.

daily chartbook 2020-11-04