Stocks had their best day yesterday since June on top of strong gains on Monday. Whether that was anticipating the election outcome, a reaction to Covid-19 news, or a relief rally the first two days after the end of the mutual fund tax year is anyone’s guess.
But I don’t think anyone expected a race as tight as the one we are waking up to this morning. At least six states are still in flux as the vote count continues. President Trump is ahead in the largest remaining states, but it is believed the majority of uncounted votes (either mail-in or big city) will lean Democratic. Most of the states should either complete or nearly complete their counts today. But several may take to the end of the week to reach a final count. It’s that close.
Perhaps more important to investors is the outcome of the Senate. While there are still six races that remain in the undecided column, the odds are fairly high that the Senate remains in Republican control. So far two seats appear to have flipped to the Democratic side and one went the other way to Republicans. Of the six remaining, four are leaning Republican and one, in Georgia, is headed for a runoff with the Republican favored. The last seat, in Michigan, has a Republican leading but most of the outstanding votes appear to lean to the Democrat. If the Senate stays red, regardless of who wins the Presidential race, the road to any major economic legislation runs through Mitch McConnell. It also means that rule changes reducing the number of votes necessary to win passage in the Senate from 60 to a simple majority are dead in the water.
The reaction this morning tells the tale. Bond yields are down. Without a blue wave, huge stimulus and infrastructure bills, the outlook for economic growth/recovery are muted. Note that both the House and President Trump wanted a robust $1.8-2.0 trillion stimulus bill. But no agreement could be reached because the Republican Senate would not support such a large package. House Speaker Nancy Pelosi pressed her bet that such a bill could pass after the election. Right now, it would appear she is going to lose that bet. Something closer to $1.0 billion is now more likely.
There are other reactions to look at. While futures, overall, have been volatile in the overnight hours, NASDAQ futures are up sharply expecting less regulatory threat. Bank stocks, which have been market leaders the past few days, are giving up some ground. With a smaller relief package likely, the Covid-19 stay-at-home stocks should do well today. The same goes for healthcare. The overhang of heavier regulation and a Medicare insurance option for those under 65 disappear. Other segments of the market are reacting as well. Cannabis stocks are lower despite the passage of a referendum in New Jersey allowing recreational use. A big blue wave might have made cannabis legal nationwide. Uber and Lyft are higher after California voters did not force the companies to treat its drivers as full-time employees that required costly benefits. Solar stocks are down as the thought of a blue wave fades.
I have said before, both in these letters and in presentations, that who is President matters much less, economically, than most investors think. In terms of economic growth and stock market performance, the first three years of the Trump administration (pre-Covid-19) were virtually identical to the eight years of the Obama administration. The keys are monetary policy and demographics, not what the President does. Mr. Trump likes to take credit whenever he can, and he certainly has taken credit for the record stock market. But Mr. Trump has no control of interest rates and relatively little control of earnings. His corporate tax cut was a boost while tariffs were a headwind. But the key to the stock market has been the decline of almost 200 basis points in long term bond yields.
So, where do we go from here? First, obviously, the election will be resolved. We should have a pretty good idea by later today, but it could be the end of the week before we know vote totals. Court proceedings may follow but there has been virtually no evidence of any tampering or wrongdoing. Courts are unlikely to declare massive numbers of votes void simply because of how they were delivered or when they arrived, if they were mailed or delivered by the time polls closed. While President Trump has whined about mail-in voting, the mail has been used in some fashion for decades. I haven’t heard the term “hanging chads” yet! But with the Senate staying Republican and the House Democratic, the odds are high that little in the way of substantive new economic legislation is likely over the next four years regardless of who wins. I don’t want to say the stock market doesn’t care who triumphs, but the result is unlikely at this point to be market moving to any great extent.
Lest we forget, there is still a pandemic. Virus counts are still rising, but so far, they are not near levels in the U.S. that require any significant change in behavior. With that said, Thanksgiving, Christmas and New Year’s all lie in front of us and each has the potential to create its own spike. Vaccines and therapeutics are coming but they won’t be here in large quantities until late spring at the earliest, probably too late to impact what is likely to be the critical stage of the pandemic. Perhaps the real message of the market this week is that it is beginning to look past the pandemic. Covid-19 won’t end suddenly. It will more likely fade away. Those at highest risk may need to be careful for a long time. For them, vaccines will be a help. But for the rest of us, the thought of a movement toward normality by mid-2021 is a ray of sunshine. There is a dark period to get through first, but since stocks are forward looking, they are beginning to look past. That may be an important reason bond yields and inflation are showing signs of creeping up.
The bottom line is the following. The fabric of American society over the next four years will be highly dependent on who wins the election. But the economic underpinnings won’t be that much different, especially with the Senate remaining in Republican hands. The stock market barely reacts to social unrest, crude political speech, wars, or climate change. It reacts to earnings and interest rates. It has been a nice decade for stocks. No one can fault investors who want to see more of the same. That means no new rules, continued low interest rates, modest growth, and, hopefully, an end to the pandemic sometime in 2021. Without a final count, fears of a massive economic change appear to dissipate. Once the dust settles, I would expect a year end rally to ensue.
Today P Diddy is 51. We once ran the NY Marathon together. Maybe it is better said that we ran in the same marathon. Ralph Macchio is 59, the Karate Kid. Former First Lady Laura Bush is 74.
One final thought. Whoever wins, this is going to be the last elected Baby Boomer. 32 years from the start of Bill Clinton’s presidency to 2024. For better or worse, it will be time to move on to the next generation.
James M. Meyer, CFA 610-260-2220