The Great Divide

The great divide.  Stocks rallied big yesterday as new theories about a split Congress drove the bulls. The services economy continued to expand in October, according to the latest PMI numbers, out yesterday.

N O T E W O R T H Y

Something for everyone.   I suppose it’s time to add yet another narrative.  Recall that there have been dueling market narratives leading up to the Presidential elections, both positive.  There was one negative sub-narrative which included the eruption of chaos resulting from a collapse in the democratic voting system.  Let’s get that one out of the way.  Tensions and emotions are certainly running high as there is no clear winner in the Presidential race, HOWEVER, votes were cast and counted… er being counted… without any violence or any major calamities. The Trump camp’s legal challenges are healthy alternatives to rioting in the streets.  Legal challenges are not abnormal in close elections and certainly do not represent a breakdown in the system… in fact, quite the opposite.  With that scenario out of the way, markets were able to focus on what truly mattered: who will be our next President, but even more importantly, as we are learning:  who will dominate the upper chamber of Congress? Leading up to election day, it appeared that the market was factoring in a blue wave, which included a Biden win and a Democratic Senate.  The thesis there was more stimulus, which led to the reflation trade I introduced you to a few days back.  However as the vote counts continued to proceed throughout the day yesterday, a new scenario emerged: a Biden win with a split Congress. Leading up to the election I wrote about how, historically, the stock market had its greatest average returns with a Democrat in the Whitehouse and a split Congress. That should be a positive for the bulls.  Putting history aside for now let’s check on the latest bull narrative.  A Democrat in the White House means a potential for an expansion in healthcare benefits, which is good for healthcare: the sector rallied by +4.45% yesterday.  A Republican Senate means: no major changes in corporate or capital gains taxes which is a win for all stocks: the S&P500 rallied by +2.20% yesterday.  A split Congress means lawmakers are less likely to impose restrictive regulations on business, namely big tech: the tech-heavy Nasdaq Composite Index rose by +3.85% yesterday and the FANG Index added +4.34%.  A split Congress means smaller stimulus and lowers the likelihood for sweeping infrastructure spending: the Industrial Sector sold off by -0.99% yesterday.  Finally, a split Congress mean less spending which leads to lower inflation:  10-year treasury yields fell by -13 basis points yesterday… banks, which have been rallying on the recent rise in rates and yield curve steepening sold off yesterday with the sector giving up -3.97%. So, let’s call this one Scenario 4: No new taxes, no new regulations of mega cap growth stocks, and expanded healthcare coverage. The narrative?  Bullish for stocks as a whole with a tilt to growth.  Clearly, the chapter is not finished being written yet as we have no actual declared winners as of this morning’s writing, but the stock market appears to have placed its bet… for now.

THE MARKETS

Stocks rallied yesterday on the potential for a split Congress which could be positive for growth stocks, tech, healthcare… not so good for industrials and materials.  Mitch McConnell also helped stocks yesterday by declaring that the Senate would have to take up a stimulus bill when lawmakers return to Capitol Hill.  The S&P500 rose by +2.20%, the Dow Jones Industrial Average added +1.3.4%, the Russell 2000 added a narrow +0.05%, and the Nasdaq Composite Index rocketed up by +3.85%.  Bonds climbed and 10-year treasury yields fell by -13 basis points to 0.76%.

NXT UP

- Initial Jobless Claims (Oct 31) is expected to show 735k claims filed, down slightly from last week’s 751k claims.

- Continuing Jobless Claims (Oct 24) may have fallen to 7.2 million from 7.756 million.

- The FOMC will announce its policy decision followed by a press conference.

- This morning, DENTSPLY SIRONA, Ball, Cigna, Iron Mountain, YETI, Becton Dickinson, Cinemark Holdings, Papa John’s, Regeneron, Duke Energy, Bristol-Myers Squibb, Starwood Properties, New York Times, Zoetis, and Parker-Hannifin beat while SeaWorld, Westrock, and Vulcan Materials missed.  After the bell we will hear from Virgin Galactic, NortonLifeLock, Sunrun, Uber Technologies, Roku, Cloudflare, Square, Take-Two Interactive, Avalara, Trade Desk, Renewable Energy Group, Zillow Group, Peloton, Dropbox, Wynn Resorts, T-Mobile, Redfin, Guardant, BioMarin, Planet Fitness, ADT, Live Nation, HubSpot, Caesars Entertainment, B&G Foods, and Monster Beverage.

daily chartbook 2020-11-05