The Real Trade Isn’t Over Yet: Understanding the Rumor vs. News Phenomenon

Stocks had a mixed close yesterday as still-exhausted bulls felt a burst of energy from an on-target inflation read. CPI didn’t blow up, which was positive news, but it is still hovering above the ground.

Nobody’s got time for that. Ok, I spent an inordinate amount of time this morning writing R code to plot just two charts for you. Calm down, we will get to them. Let me first introduce what it is I want to talk about today. Ok, so now I am flipping through my well-worn Book of Wall Street Sayings, and I stop on the page that reads "Buy the rumor, sell the news.” Have you ever heard that saying and tried to comprehend it for a few moments only to abandon the exercise because it made absolutely no sense to you? By the time we get done this morning, I think you will have a better understanding of it.

The saying quite literally tells us to buy a stock, bond, sector, index, or whatever as soon as we start to hear buzz about some sort of future event, and when that event actually occurs, assuming it does, we should sell out of our position. Of course, it works both ways; sell on rumor (if it is negative) and buy on the news. My academic friends who read my note, I am sure, are RIGHT AS WE SPEAK, thinking, “hmm, I can run an event study on this and prove or disprove this.” Don’t worry academic friends, it is already proven, and by proven, I mean it mostly works (mostly is not an academically acceptable word, but please just ride with me for a moment).

I am bringing this old adage up today because of how the crazy equity markets have been behaving leading up to the election and beyond. An image just popped into my mind. Have you ever watched the chaotic event of a horse being loaded into the starting gates before a race. It takes a bit of effort to get them in and then they wait, NOT PATIENTLY, champing on the bit for the bell to ring. Once out of the gate, they all – er, jockey for position in the pack, which is also chaotic. That is exactly how sectors behave leading up to elections with the starting bell being the morning after election day. And they’re off! Sectors jockeying for position – which sectors would do best under a Trump Presidency and a red wave. Let’s have a look at how sector ETFs performed since early October through current. I started with earlier October, because that is when Trump started to gain in the polls. Have a look and keep reading.

Now isn’t that an awesome chart. It certainly took me long enough to create it. On this chart, you can see clearly, the messy volatile trade of the sectors leading up to election day, at which time the lineup became pretty clear. It should be crystal clear which sectors investors believe to be winners and losers under Trump 2.0 + Republican Congress. Now, here is the interesting thing. If you were paying attention above when I introduced the adage and the academic terminology, you might have looked at the chart a bit more closely. You can see that there were some trend reversals immediately after the election results were in, but for the most part the winners were already kind of winning leading to the election. They simply got turbo charged after the results came in. So, does this disprove that Wall Street saying?

Ha! Not so fast. And here is the main message for you, my precious, regular followers. ELECTION DAY WAS NOT THE EVENT! Go on, PLEASE, read that last sentence again. The Guy is not even in the White House yet; his title is Former Future President Trump. Get out your calendars. New members of the Senate and House will be sworn in on January 3^rd. We can expect lots of rhetoric from the neophytes and party faithful on both sides of the aisle, don’t expect any game-changing legislation – yet. Former Future President Trump will become President Trump on Friday, January 20^th. How do I know this? No, I didn’t get an invite to the inauguration. I know this because that date is set by the 20^th Amendment to the US Constitution! That means, folks, that the market is still trading ON THE RUMORS. Any hopes of NEWS, won’t come until after January 20^th!

So how does this whole thing work? It is clear that there is quite a bit of – well, exuberance out there, and some of it even makes sense. We would logically expect stimulative legislation to increase Consumer Discretionary stocks (winning horse ☝️🏇). We would also expect Financials stocks to benefit from lawmakers who are dedicated to deregulation; regulation is a big gating factor for traditional banks and diversified banks whose dealmaking is limited by aggressive DOJ and FTC. 😉 Let’s keep running with this. What if, immediately after the Presidential inauguration, Congress begins working on a new follow-on tax package to the TCJA ’17 tax package, which expires at the end of 2025. If the adage is correct, we would expect Consumer Discretionary to sell off on the… wait for it… news. WHY? Because the best-case scenario is already factored into the market. What is my message to you today? Be careful, you may have already missed the rumor trade. Don’t just jump in and buy all the winning sectors expecting a years-long run. Sorry folks, you are going to have to do your homework on each individual stock and determine if they have got the gas to go on – even beyond the news.

Do you find this interesting? I do, which is why I am going to include this chart and the one that follows in my Daily Chartbook, which you download below and track how this very trade turns out as we approach the news event and beyond. The following chart simply shows total returns of sectors since early October.

YESTERDAY’S MARKETS

NEXT UP

• Producer Price Index / PPI (October) is expected to have picked up to 2.3% from 1.8%, and the Core PPI is expected to have shifted higher to 3.0% from 2.8%. This could be a market mover – it is a leading indicator of inflation.
• Initial Jobless Claims (November 9^th) is expected to come in at 220k after printing 221k last week.
• Fed speakers today: Kugler, Barkin, and Chairman Powell.
• This morning, Disney beat EPS and Revenue estimates while Advanced Auto Parts came up short. After the closing bell we will hear from Applied Materials.

DOWNLOAD MY DAILY CHARTBOOK HERE 📊