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Here, there, everywhere. Stocks ended the week mixed as investors awaited some finality on the Presidential race. The labor market had a strong showing in October and investors wonder if the trend will continue with new COVID surges.
N O T E W O R T H Y
No news is good news? The voters have spoken, the networks have spoken, Trump’s lawyers have spoken, and yes, the market has spoken. It wasn’t the resounding victory either side had hoped for, but the market seemed to have found what it had hoped for - a winning scenario. The Presidential election is largely accepted to have been won by former VP Biden despite some, what appear to be, yet unproven legal challenges from the President. The Democrats’ hold on the House Of Representatives has weakened, though they still maintain a majority. That brings us to the all-important Senate, which appears even… for now. A Senate runoff in Georgia scheduled for January appears to be the race that will determine what the upper chamber will look like for at least the next 2 years. It is clear that the blue wave scenario didn’t make it to Capitol Hill, but once that scenario began to takes shape, markets began to factor in a split Congress with the Senate remaining in Republican control. As I outlined this scenario late last week, before the election was called, the bull narrative around a Biden Presidency and Republican Senate would mean no sweeping changes in corporate governance or taxes combined with a Democratic growth agenda which is surprisingly similar to the Republican one. There appears to be hope that under this scenario, the necessary cooperation between the branches of Government and both parties can resume and get the US economy back on the growth track, quickly. The markets actualized its thesis in the following fashion. Stocks were up with the S&P500 gaining +7.32%, its biggest weekly gain since early April. Treasury yields had been rising leading up to the election resulting from the expectation that a larger, blue wave-driven, stimulus package would produce inflation. Once the split congress scenario became more probable, yields came down by -7 basis points, though they are still on the high side of their recent range. Tech stocks have been faltering since early summer as investors jumped in and out of the sector as valuations surged and withdrew. In the two weeks prior to the election, the sector lost -8.68% with the belief that a blue wave would mean regulatory scrutiny and potential anti-trust litigation. The split congress scenario appears to have sidelined those fears and the sector added +9.7% for the week. Indeed, all growth stocks appear to favor a split Congress, as evidenced by the S&P500 growth index climbing by +8.64% for the week compared to the S&P500 Value Index adding just +5.67%. A massive expansion of the Affordable Care Act is unlikely in a split Congress scenario, but a complete dismantling of it is less likely, leaving us with a continuation of the current environment, which has been good for the healthcare sector, which rose by +8.25% last week. Renewable energy ran up significant gains leading up to the election with hopes of a blue/green wave. A popular investment leading up to the election was in the solar energy industry which racked up significant gains this year but spent the past few weeks giving back some gains as investors took profits off the table. Though a mixed Congress would not lead to a massive Green New Deal, investors seemed to retain hope that progress could be made and was reflected in the Invesco Solar ETF (TAN) adding +9.87% last week. The Biden victory / split Congress scenario also had an impact on emerging markets, which gained +6.61% last week. While Biden is expected to maintain a hard stance on China, a split Congress would ensure it, though the new administration would likely be less confrontational which would perhaps, yield better results. Though we may be past some of the bear-knuckle rancor that led up to the election, the fight is far from over as the Trump Administration has yet to concede the race and legal challenges will most likely continue up to the inauguration in January. While political analysts are predicting that the Georgia runoff will lead to a Republican Senate, their track record for predicting results has been, let’s say, less-than-stellar. With those elections scheduled to take place in January as well, we will not be able to truly move on until then. We can therefore expect lots more positioning and repositioning in the coming weeks. The good news is that historically, a Democratic President with a split Congress has yielded the best average returns for stocks. In second place behind that scenario is a Democratic President with a united House.
THE MARKETS
Stocks had a mixed close on Friday as the bulls rested and awaited official election results. The S&P500 slipped by -0.03%, the Dow Jones Industrial Average fell by -0.24%, the Russell 2000 Index traded off by -0.96%, and the Nasdaq Composite Index climbed by +0.04%. Bonds slipped and 10-year treasury yields added +5 basis points to 0.81%. Gold added to its climb ending the week up by +3.86% and Bitcoin continued its chaos-inspired rally adding +14.03% for the week.
NXT UP
- Fed Chairman Powell will speak today in addition to separate appearances by Fed Presidents Loretta Mester and Robert Kaplan.
- The Treasury will sell $54 billion 3-year notes.
- This morning McDonald’s beat estimates while Plug Power and Cars.com missed. After the market, we will get results from RingCentral, ZoomInfo, RealReal, Nikola, Simon Property, Occidental Petroleum, Beyond Meat, Taubman Centers, Novavax, and Norwegian Cruise Line.
- The week ahead has lots of earnings along with NFIB Small Business Optimism, JOLTS Job Openings, inflation numbers, and University of Michigan Sentiment.
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