Surfing the waves. Stocks jumped for another session yesterday as investors assessed all of the possible outcomes to the election and decided, all were good. The FOMC met and made no changes to policy.
N O T E W O R T H Y
No stopping us… I know what you're thinking: “WOW, how long can this go on?” Not the election ballot counting, but the recent rise in stocks. I have been spilling a lot of ink describing the various scenarios and narratives around the election results. Interestingly, all seem to be positive in the long run, with only one being possibly negative in the short run… until yesterday. That scenario was one in which we don’t know who will be in charge in the nation's capital until January 20th. Well, it is looking more and more like that might be the case. Even though the trends appear to favor Biden for the Presidency, there are still some close races in which Trump is narrowing leads. That said, the Trump camp appears to be changing its strategy to one of litigation. In other words, the President is not likely to concede any time soon, which means that we will not have certainty for some time as litigations go before judges and ballots are recounted. Yesterday morning, markets were factoring in a Biden win with a split Congress as the expected blue wave faded. However as the day wore on and more mail-in ballots were counted and reported, the trend in all states except Arizona appeared to favor Biden, which was consistent with the morning’s narrative. What was not consistent with the morning narrative was the race for Senate control, which was assumed to remain in Republican control. By mid-session, analysts began to point to the Senate race in Georgia which appeared to be heading to a runoff vote… in January, and may ultimately determine control of the Senate. Prospects of the Blue Wave came back, which means MORE STIMULUS. In response to the development, traders bought industrials (up by +2.28%) and small cap stocks (up by +2.78%). But that wasn’t all that traders consumed yesterday. The buying continued in Technology as evidenced by the sector’s rise, which added +3.12% along with the tech-heavy Nasdaq gaining +2.59%. In other election news, in case you hadn’t noticed, several states legalized cannabis for recreational use. Good for municipal taxes… I suppose. Also good for the companies involved in cannabis production. Stocks in those companies ran up sizable gains yesterday as evidenced by poster child Canopy Growth (ticker symbol: WEED) which gained +10.94% and AdvisorShares Pure Cannabis ETF, ticker symbol: YOLO (I can’t make this stuff up) which added +9.76%. All in all it was a broad based rally for stocks on perhaps, elation that at some point hopefully soon, we can get back to the business of getting the economy back on track.
In other news. The FED has spoken, or actually, spoke yesterday. Not surprisingly, policy was unchanged with the Fed Funds rate remaining at near-zero. In his post-announcement discussion, the Chairman mentioned that a large fiscal stimulus package may not be “forthcoming”. So, maybe, the FOMC is also expecting a split congress. That said, the Fed redoubled its commitment to monetary stimulus and Chairman Powell made it abundantly clear that the Bank would remain accommodative for a long time into the future. There was only one subtle hint of a policy change. While the Fed’s bond buying would continue at the same levels, the targeted maturities will be further out on the curve in order to keep longer maturity yields lower. The subtle shift in policy has several implications. For banks, the lower long maturity yields and a flatter yield curve is restrictive as it eats into a bank's net interest margin. For corporate and retail borrowers, lower rates are stimulative. Lower rates longer is also positive for stocks as investors clamor for real returns. For now, the Fed appears to have steered clear of politics as expected, but we will surely hear a lot more from the bankers after their December meeting… assuming we know the outcome of the elections at that point.
THE MARKETS
Stocks soared yesterday as traders found something for everyone amidst the election chaos in which all roads seemed to lead to a brighter future for the economy. The S&P500 climbed by +1.95%, the Dow Jones Industrial Average rose by +1.95%, the Russell 2000 jumped by +2.78%, and the Nasdaq Composite traded up by +2.59%. Bonds also climbed and 10-year treasury yields were unchanged at 0.76%.
NXT UP
- Change in Non-Farm Payrolls (Oct) is expected to show +593k additions compared to last month’s +662k new jobs.
- Unemployment Rate (Oct) may have decreased slightly to 7.6% from September’s 7.9%.
- This morning, DISH Network, CVS, Zimmer Biomet, Coty, Virtu, and Marriott beat estimates while Cheniere Energy and Mylan missed.
- Next week we have lots more earnings along with JOLTS Job Openings, CPI, PPI, and University of Michigan Sentiment. Check back on Monday for calendars and details.