A razor-thin margin outcome is enough to make the market dance.
Imagine the dancing lady emoji. That’s me later this month. No one will storm away from my Thanksgiving table! It looks like the election outcome may bring some welcome calm and that the market will get divided government. The market loves the prospect—it, too, is dancing. Not as many fireworks, but the Senate race was always most important one. We may have to wait for two Georgia runoffs in early January (if Republican Sen. Perdue fails to get 50% of the vote, which is the case as of this writing) to know for sure the GOP majority held but it’s hard to see Georgia electing two Dems to the Senate. All the pre-election talk about the House was about how many seats would Dems gain—at this writing, it looks like they’ll lose 10 seats instead. A razon-thin majority that the markets will dance to. This week’s rally supports the idea that the perceived “worst case” election scenario, a “Blue Wave” that fizzled, often gets discounted before the election. Strategas Research is encouraged a market dominated by large Tech weights is welcoming new players and thinks the challenge in the weeks ahead will be deciphering the price action from the headlines. Consumer Discretionary here and abroad is holding its own against Staples even though U.S. Covid cases have turned parabolic, surging past 100K for the first time, while much of Europe is dealing with another round of lockdowns. IMAO, that’s because the market understands these Covid waves are temporary! The same rationale is behind this week’s collapse in the VIX, which suggests the market sees more certainty in the ultimate, but currently contested, election outcome: it’s temporary!
Lost in all the talk about a “No Blue Wave” rally is the role an improving earnings picture may be playing. With nearly two thirds of S&P 500 companies having reported, 89% have met or beat consensus, well above the 78% average over the last 12 years. Eighty percent are doing it on the top line vs. the typical 58%. Positive earnings and sales revision trends persist, led by communication services, materials and financials. Jeffries shares that earnings revision ratios hit new all-time highs in small-cap and large-cap stocks, with small seeing two upward revisions for every downward revision, led by financials and materials. Cyclicals have delivered the strongest surprises, with Consumer Discretionary a standout. Every subgroup in the sector has delivered double-digit beats, with autos and softline retail surpassing expectations by more than 100%. This may seem somewhat surprising, as gridlock likely kills hopes for mega fiscal stimulus. But it sees favorable macro tailwinds in housing’s surge, manufacturing’s ongoing inventory rebuild and a capital expenditures revival. It’s also likely corporate and individual tax cuts remain in place, new labor and carbon restriction policies are avoided and the Green New Deal is put off for a day far away. Cornerstone Macro thinks bipartisan bills that could pass include an onshoring agenda and an infrastructure bill, measures the markets would welcome.
Amid all the election hoopla, little attention was paid this week to the Fed. It met, and while it made no changes, it’s expected that it will step in with longer-term Treasury purchases to keep yields constrained if Congress and the lame-duck White House can’t agree on even a slimmed-down fiscal deal. This is on top of massive global monetary stimulus that keeps coming. The Fed, European Central Bank, Bank of England and the Bank of China have expanded their balance sheets a collective $6.5 trillion so far this year and that growth—70% year-to-date—is almost certain to accelerate if more fiscal aid isn’t forthcoming. Perhaps with a divided government, and less drama, the “grownups” can work together, Evercore ISI says, citing the long-established working relationship between Biden and Senate Majority Leader McConnell if indeed Biden is the ultimate winner. There were some encouraging words from McConnell this week as he suggested something needs to be done amid the fresh wave of virus cases with winter on its way. He even indicated a desire to help state and local governments, moving beyond just supporting such hard-hit sectors as airlines and hospitality. Any fiscal stimulus is certain to be a slimmed-down version of the $3 trillion+ that a “Blue Wave’’ Congress was expected to push. Nonetheless, the return of a bipartisan backdrop thanks to razor-thin majorities and no presidential mandate (the market is a lady, BTW, and she’s dancing!) would be bullish for stocks and conducive to both the secular and cyclical, the offensive and defensive, and the large and the small. It’s also how Evercore ISI thinks the S&P gets to 4,000 in next year’s first quarter. The market hates uncertainty. But on the day after the election, with lots of results unknown, the market rallied hard. So, it’s a contested election. So what? It’s temporary, much like the virus. Imao.
- Still thinking “V” The ISM Manufacturing Index shot up in October by the most in 11.5 years to a 3-year high as factory activity gained significant momentum. Markit’s companion gauge hit a 22-month high, and September factory orders rose well above forecasts. The ISM read equates to 4.8% real annual GDP growth.
- Still thinking “V” Separate ISM and Markit services surveys reflected similar improvements in non-manufacturing activity, with Markit’s jumping to its highest level since April 2015.
- In the end, it’s all about jobs … While initial claims disappointed, continuing jobless claims are falling fast, implying a current unemployment rate of 5.5%! That would be an astonishingly rapid drop from its worst-ever peak of 14.7% in April (based on records dating to 1939). This morning’s report put joblessness at 6.9% as nonfarm jobs were up an above-consensus 638K. Labor market improvements have generally been much better than expected in the wake of the fiscal cliff and two more Covid waves.
- … and not all the jobs news is good ADP private payrolls rose well below consensus—365K vs. 600K—in October. This marked their smallest gain in in the past three months as companies slowed the pace of hiring amid the new resurgence of Covid cases. On the other hand, the increases were broad-based across industries, led by leisure and hospitality, one of the industries hardest hit by the pandemic.
- Construction spending slows It rose 0.3% in September, less than half of August’s increase, as nonresidential activity declined a fourth straight month. On the positive side, residential building activity rose a fourth straight month.
- The global recovery isn’t reaching everyone While a wide majority of countries around the world are experiencing manufacturing growth, a handful are still contracting, according to PMI surveys: Mexico, Japan and the seven Southeast Asian countries.
Election wrap-up: a new generation Biden is estimated to have secured a 27 percentage-point lead among 18- to 29-year-olds, vs. 19 for Clinton four years ago and nine for Kerry in 2004.
Election wrap-up: Trump, the network Speculation has Trump, if he ultimately loses, potentially launching his own television network to compete with Fox News for conservative viewers and attack Biden, possibly with an eye toward a rematch in 2024.
Election wrap-up: national polls the big losers They had another terrible Election Day, leading Fundstrat to ask: How can all these “live polls’’ get 1,500 results per week? This implies 33% of the U.S. was contacted during the 33-week election cycle, yet it does not know of a single person ever contacted by a pollster. When it asked on Twitter who has been contacted, only 5% responded they had.