Green Wave Sweeps Markets on Election Week
Stocks closed mostly flat on Friday as traders looked for clarity around the presidential and congressional election results. Sentiment was kept in check by better-than-expected U.S. unemployment data.
The S&P 500 ended the session down less than 1 point at 3,509.44. The Nasdaq Composite rose less than 0.1% to 11,895.23. The Dow Jones Industrial dipped 66.78 points, or 0.2%, to end the day at 28,323.40.Energy and financials were the worst-performing sectors in the S&P 500, falling 2.1% and 0.8%, respectively. UnitedHealth led the Dow lower with a decline of nearly 2%.
Democratic nominee Joe Biden leads with 253 electoral votes, according to NBC News projections, while President Donald Trump has 214. Votes are still being counted in several key states including Nevada, Arizona, Pennsylvania and Georgia. According to NBC News, Biden has a slight lead in Georgia and Pennsylvania.
Despite the uncertainty around the presidential vote, Wall Street notched its best weekly performance since April. The S&P 500 and Nasdaq jumped 7.3% and 9%, respectively, for the week. The Dow rose 6.9% this week. The S&P 500 also posted its biggest election week gain since 1932.
Victories by Republicans in several key Senate races, thus lowering the odds of a “blue wave” and the potential for higher taxes and stronger regulations, have been cited by Wall Street strategists as a reason for the rally in tech stocks. However, Republicans have not yet won the necessary seats to control the Senate, according to NBC News projections, with two potential run-off elections in Georgia.
“The market is just getting more comfortable with the outcome of a divided government, where we see a continuation of political gridlock [and] no meaningful changes on tax policy,” said Dan Eye, head of asset allocation and equity research at Fort Pitt Capital Group.
To be sure, a divided government could make it harder for lawmakers to push through new fiscal stimulus. The Washington Post also reported, citing sources, that the White House wasn’t expected to propose a new aid package. Instead, Senate Majority Leader Mitch McConnell is expected to push through a “skinny” aid package, which has been dead on arrival with House Democrats, according to the report.
Alicia Levine, chief strategist at BNY Mellon Investment Management, said that the possibility of Democrats winning narrow control of the Senate was one of the major risks not priced into the market even if the runoffs wouldn’t necessarily cause the markets to dip.
“The market is now pricing in a Biden presidency with a Republican Senate, and the rotation that we saw was based on that,” Levine said. “And if there’s an increasing risk that that’s not the case for the Senate, then this entire move could also be somewhat at risk as well.”
Levine also said that the strength of tech stocks earlier this week was due in part to their strong earnings performance and resiliency in the case of new economic restrictions in the United States during the winter to slow the spread of the coronavirus.
Republicans have filed a flurry of legal challenges in several states related to the ongoing vote counts, and the Trump campaign said it will request a recount in Wisconsin.
In an announcement from the White House on Thursday night, Trump falsely claimed victory in several states and made accusations of voter fraud without evidence, saying “there’s a tremendous amount of litigation generally because of how unfair this process was.”
The Biden campaign, meanwhile, has called for all votes to be counted.
“Democracy’s sometimes messy. It sometimes requires a little patience as well,” the former vice president in a short speech in Delaware on Thursday, adding that he was confident his ticket would be declared the winner once all the votes are counted.
Strong jobs report
The Labor Department said the U.S. unemployment rate fell to 6.9% in October from 7.9%. Economists polled by Dow Jones expected the rate to dip to 7.7%. The U.S. economy also added 638,000 jobs last month, topping an estimate of 530,000.
“The latest jobs report shows the U.S. economy is rebounding quickly from COVID-related shutdowns in the spring with the unemployment already dropping below 7%,” said Tony Bedikian, Head of Global Markets at Citizens.
“Despite strong signals that many Americans are getting back to work, however, the number of coronavirus cases is rising and that may mean new restrictions on daily life that could further accelerate a shift to a more digital economy and increase calls for additional government stimulus,” Bedikian added.
It's Friday, there is a lot to cover this week, so let me get right to it.
First, my thoughts on the election results:
- As I predicted, it was a lot closer than the polls were leading people to believe because a lot more people voted for Trump than pollsters predicted. There was no "blue wave" or "red wave", the United States remains more divided than ever when it comes to political allegiances.
- Vice President Joe Biden is clearly in the lead and I believe once all votes are accounted for, he will be declared the next President of the United States. Still, if he wins, he needs to unite the country and that means he will have to govern from the center and reach out to his Republican counterparts.
- The big surprise in this election was Republicans in the Senate and the House drastically over-performed doom-and-gloom predictions of their demise amid a Trump landslide loss. At this writing, Republicans may be on track to pick up between five and ten seats in the House and they could be well-positioned to make a serious run at the majority in the House in the 2022 midterms.
- All this to day, it's the Democrats, not the Republicans, who need to do a lot of soul searching after this election.
- What about Trump? He won't concede defeat but he's done for now. However, he’ll be back for more in four years, stronger than ever. (read Conrad Black's latest on why Trump may be down, but he's certainly not out, he raises many good points).
- No hefty tax increases ahead, not on individuals or corporations and not on capital gains.
- No increase in regulations, it will be a lot tougher in a divided government.
- No more tariffs as the US engages with the world and re-embraces globalization.
This was the common refrain you heard over and over this week from top Wall Street strategists, including JPMorgan’s top-rated equity strategist Marko Kolanovic who believes the election outcomes are shaping up to be “the best of both worlds for stocks,” calling for a sustainable rally for the market:
Kolanovic, the bank’s head of macro quantitative and derivatives strategy, said a possible Joe Biden presidency with a split Congress could result in a market-friendly environment with lower taxes, status-quo regulations and a better U.S.-China trade relationship. He called this outcome “one of the most favorable scenarios for the market.”
“A GOP senate majority should ensure that Trump’s pro-business policies stay intact (tax code, deregulation), and if Biden is confirmed we should be able to expect an easing of the trade war (which should boost global trade and corporate earnings growth),” Kolanovic said in a note to clients on Friday.
But the ferocity of the melt-up in stocks this week was a bit peculiar, especially coming off a bad October and last week where people were warning the tech bubble is imploding and another stock market crash is looming.
Christopher Cole, volatility trader and tail risk manager, tweeted this on Thursday:
"The stock market is a derivative of the options market. The market action the last two days has little to do with who won the Presidency, Senate, or expected policy or stimulus actions. It has everything to do with dealer hedging of short-dated options flows (gamma, vanna, charm)."
Now, you can argue they were buying puts and calls going into elections but whenever you see the market melt up 7% during a week of a major political event, you know there were many institutions last week buying a ton of short-term call options on large mega cap tech shares, similar to what the Nasdaq whale did two months ago. Dealers were caught off guard and they had to delta hedge their books, meaning buy more underlying stock as these call options came into the money, exacerbating the surge in some key stocks like Apple, Microsoft, Amazon, Facebook and plenty of others.
The stock market is a derivative of the options market— Christopher Cole (@vol_christopher) November 5, 2020
The market action the last two days has little to do with who won the Presidency, Senate, or expected policy or stimulus actions
It has everything to do with dealer hedging of short-dated options flows (gamma, vanna, charm)
Welcome to Jay Powell's Wall Street, that liquidity orgy I talked about in June is alive and well, speculators are gorging on momentum stocks whenever volatility rises, trading like crazy in an environment where risk-taking is not only encouraged, it's dominating markets.
Now, to be clear, the Fed wants everyone to take more risks, including pensions, because the Fed and other central banks are still fighting the deflation demon lurking out there, so it welcomes asset inflation, housing inflation and any inflation it can get at this point.
The problem is the Fed and other central banks are fighting a losing battle, they can create asset inflation and housing inflation but have no influence on overall inflation which comes from sustained wage gains.
Worse still, these policies are distorting markets and exacerbating rising inequality, which only ensure more deflation down the road.
This is why I believe we are in for a long, tough slug ahead where rates on long bond yields are heading lower and all risk assets will remain very volatile.
People trading these markets are not seeing the endgame here but one very big macro fund which is down big this year may ultimately prove to be right on its bearish calls:
COVID-19 cases are surging in Europe, while the media claims the disease is mainly a US-only problem. pic.twitter.com/bgBst6DHlG— Dr. David Samadi, MD (@drdavidsamadi) November 2, 2020
U.S. records over 121,000 COVID-19 cases, setting record for new daily cases https://t.co/eVlil5GQ8A— CBS News (@CBSNews) November 6, 2020
Unemployment is falling. Long-term unemployment is ballooning https://t.co/9PrRRNCJzc— Leo Kolivakis (@PensionPulse) November 6, 2020
Coronavirus stimulus update: McConnell and Pelosi push for relief bill https://t.co/ZEorNQCVNS— Leo Kolivakis (@PensionPulse) November 6, 2020
I know, it's all good, as long as Jay Powell and other central bankers keep pressing hard on the gas, but if you really think about it, this market is at risk of overheating and exhausting itself.
"We're going into what could be a winter of discontent. It's not going to matter what the data looks like going into winter. It's not going to matter how much more stimulus the Congress puts in. It's all about Covid:" MS's Ellen Zentner https://t.co/JQ0kgg9nQz— Lisa Abramowicz (@lisaabramowicz1) November 6, 2020
Not surprisingly, Tech (XLK) led the way as FAANG stocks and cloud stocks (CLOU) surged this week followed by Health Care (XLV) which had a great performance on the back of big pharma, health insurers and big and small biotech companies (IBB and XBI) which surged as the RISK ON trade dominated this week.
This week we are reminding clients that, in times of heightened political uncertainty, one must keep his/her eyes on corporate earnings. So far in Q3, 86% of S&P 500 companies have reported EPS above expectations. This is much higher than the ~70% historical beat rate. But more importantly, investors must keep in mind where we are in the earnings revision cycle. As our Chart of the Week shows, not only are we in the early phase, but, similar to past economic/manufacturing recoveries seen in 2009, 2013 and 2016 (second panel), our global earnings revision index has just broken above its one-year moving average (third panel). This suggests that a sustained recovery in corporate earnings is underway and should persist in 2021. Then, if history is a guide, the earnings tailwind should eventually push global equities to all-time highs. Already we have seen strong moves in Japanese and EM equity indexes. As such, non-US > US equities seems a safer strategy to stay put in stocks.
And as a bonus, today I was checking out two biotech stocks getting clobbered, Bluebird Bio (BLUE) and Global Blood Therapeutics (GBT):
Biotech dip buyers, keep these on your watch list but don't rush to buy them yet, there could be more pain ahead.