What a difference a week makes, at least from a market perspective. A few days ago everyone was worried about rising Covid cases, lack of stimulus and the prospect for an ugly, drawn out US election. Covid cases are still setting new highs across the globe. Optimistically, hospital capacity is not at the peak fear from early Spring, but is trending in the wrong direction. Mitch McConnell, expected to continue leading the Senate post-election, has indicated a desire to approve stimulus during the lame-duck session. Who knows if they can get this done. The third worry, namely the election result, is unlikely to be fully resolved until Trump exhausts every legal option, even as it looks like Joe Biden has more than enough votes.
The news is hardly conclusive or overly optimistic. At least not enough to explain the 7% – 10% pop in major averages this week. Is a divided Government really that great for the economy? Or is it great for the select few mega-cap technology leaders everyone is exposed to? Wednesday produced the greatest post-election performance day in history. However, there were more stocks down on the day than up. That is very hard to do in a 2%+ rally! Thursday’s improvement from a breadth standpoint was much more encouraging. Financial, industrial and consumer stocks rebounded smartly yesterday after getting crushed on Wednesday. It looks like last week’s short trade was quickly reversed.
Not to be outdone, interest rates reacted violently after it became clear a blue wave was not arriving. Prior to Tuesday, 10-year Treasury yields rose nearly 50% in just two months. Thoughts for a bloated stimulus bill and an even larger money printing press offset any future negative effects from the proposed increase in taxes. This was expected to boost growth and bring in higher inflation, causing interest rates to rise. Both scenarios are thrown out with a Republican controlled Senate, causing rates to drop from 0.90% to 0.76%.
With all the above now known, let’s take a look at the winners and losers from this election, assuming a President Biden, Republican Senate and tightening Democratic House. This is not guaranteed at the moment with a likely Senate runoff in Georgia, but is highly likely.
• Fast growing, high P/E stocks: FANGMAN investors can keep partying. Low rates (less stimulus keeps a lid on inflation for now) means elevated P/E’s are here to stay, especially for companies that show a consistent ability to grow revenues.
• Housing: Another beneficiary of rates staying lower for longer. 30-year mortgages at 2.5% versus 4% means a lot more buying power for new home purchases, and even more refinancing options for consumers who haven’t lowered their rates yet. Demographics alone are solid for new home building, but an added kicker of lower rates is much more powerful.
• US corporations and high-income earners: Eliminating Trump’s tax plan is off the table with a Republican controlled Senate. No increase in taxes is a 5% – 10% positive for the bottom line of many US based companies, basically in line with the percentage rally in the markets this week. Many investors were rightfully concerned with a potential increase in capital gains taxes. They no longer have to sell their massive FANG-related gains in fear of a higher tax bill in 2022.
• Independent voters and Middle America: In round estimates, typically we have a 1/3rd even split among Democrat, Republican and split/independent voters. It seems a large portion of voters were tired of Trump and/or fearful of potentially socialist policies. This led to a split ticket. Our Constitution was written, on purpose, to get politicians to meet in the middle. A split DC is supposed to work together and benefit the many. We’ll see if a more bipartisan effort can be had as Biden and McConnell have worked together in the past.
• Covid related: No one can stop a virus, but a science-led approach and more emphasis on mask wearing should raise awareness. Less partisanship on the issue is welcome news.
• Health Insurers: Obamacare is not going to go away with Biden at the helm. The Supreme Court can rule on certain aspects, but is highly unlikely to completely repeal it. Biden’s Government option plan is also out the window. This means insurers have one less proposed competitor to worry about. Insurance company stocks are up ~15% this week.
• Radical corners of each party: There were a lot of voters with split tickets this season. Americans seem to be fearful of how far left or right some portions of the political sphere is becoming. While no system is perfect, it remains to be seen if there is a better way to run this country. Socialism is not what the average American wants.
• Climate: Our parties have differing visions but it should be clear we can do better from a climate standpoint. A President Biden will have to give something in order to get more Green policies approved. The good news is Executive Orders can accomplish a lot. As will renewed partnerships with our European allies. Even better news is that corporations are doing this on their own. ESG funds and investors demand it. However, he would have gotten more done here with a blue wave.
• Banks and savers: TINA is alive and well as rates come back down. Less fiscal stimulus means more Fed yield controls. Lower rates for longer. This is bad for bank margins and equally bad for savers who are pushed out the risk curve in order to get decent returns on their investments. Maybe DC surprises us and gets stimulus checks out sooner (December) rather than later (February).
• Pollsters: If the 2016 race and Brexit vote wasn’t enough, pollsters really hurt their industry this year as projections were way off. Whether it is the hidden voter or their inability to get a proper online platform, it shouldn’t matter. Many people and corporations relied upon polls for years. Who knows if this really changed anyone’s vote or donations, but it’s quite clear the polls were wrong yet again. This hurt some investors as bets were placed in the wrong areas.
• Short-term market timing: As Jim Meyer has stated numerous times, the economy has performed similarly under Trump and Obama. Making short-term decisions due to an election cycle is a very difficult game to play. Investors, experienced and newbies alike, got very defensive last week and are now getting back into the market at higher prices, if at all. The market consistently knows more than most investors. Focusing on companies that possess industry leading products, fair valuations, clean balance sheets and catalysts for growth over the long-term eventually wins out, and carries a lot less stress.
Currently, bulls have taken charge by pricing in a lot of the “winners” prospects. Who knows if a long legal battle over vote counting will halt this rally. There are still rising Covid case counts to worry about. Stimulus has no time table. For now, we take what we can get, which is a surprisingly strong response led by the Nasdaq’s 9% bounce this week. Low rates, potential for stimulus and prospects for a better 2021 after we get through the winter months is too much for the bears to handle so far. Let’s see if the 3rd attempt at 3,600 on the S&P is the one to finally break out of this trading range.
Actress Emma Stone is 32 today. Sally Field, is now 74.
James Vogt, 610-260-2214