Amidst an uncertain election, three factors contribute to market strength
That said, the picture seemed to get a little clearer from the markets’ perspective and it appears that Vice President Joe Biden is on the brink of at least winning the minimum number of Electoral College votes, 270, in the initial pre–certification vote count, if the current trends hold. This is a huge if. Also, the consensus remains that the Republicans will retain the Senate. It seems likely that those initial counts will largely be over by the end of the day Friday, Nov. 6. Formal certification will take a couple of weeks, as it always does, and there may be court challenges, but the market is likely to base its view of the results on that initial count until there is a reason to change it, and that is not very common at all in our history.
The trading desk perspective
The good news is that the wait until this point has been orderly and the markets have not expressed any real angst as they wait with the rest of us. The overnight futures market is typically a good proxy for measuring how concerned the broader equity market is with what is happening in the vote. By observing the volatility of the price behavior of futures and the volume of instruments being traded, we can gauge how concerned market participants are about what they are seeing.
The industry early consensus on the recent election night was that the market seemed to have priced in a blue wave of Democratic party success and did not get one. But, from the point of view of our trading desk, both price behavior and volumes in the futures market indicate that it viewed it as an average election night, with both volumes and price volatility being about one third of what we saw in 2016.
That sense of calm in the markets extended into the next day, on Wednesday, Nov. 4, pretty much across the board. Looking across markets, stocks had a good day. It should not be enormously surprising that the biggest positive moves were in the U.S., since it was the presidential election that was dominating the news.
We believe there were three factors contributing to that strength:
- With Republicans likely to retain control of the Senate, the expected corporate tax hikes of a unified Democratic government are very, very unlikely to materialize. This alone removes an estimated potential 6% hit to corporate earnings.
- Senate majority leader Mitch McConnell indicated early on Thursday that he saw a stimulus deal as “job one” for the Senate when it goes back in session next week, so maybe the market will get both no new taxes and a stimulus package, albeit likely a smaller stimulus than what would have occurred in a unified Democratic government.
- Interest rates, that had been rising on the expectation of a potentially very large stimulus package, fell 0.165%, as measured by the 10–year U.S. treasury note. Lower interest rates have been a strong factor in supporting stock prices this year.
Tech, growth and value
Within the U.S. market, technology fared well in the days following the election. This was probably a result of the fact that the Biden tax plan had specific elements that seemed to be specifically targeting technology companies. With no control of the Senate, that plan will likely no longer be implemented. This was yet another good week for performance of tech companies in general and mega cap growth tech stocks in particular, both of which have dominated market performance all year.
We do not think this is a harbinger of what is to come over the next year. We think that the closer we get to a vaccine, the more the reopening trade will drive the market, as it usually does, in the direction of a cyclical recovery. In that environment, value stocks tend to outperform growth stocks, especially when growth stocks are notably expensive. As we sit here today, growth stocks by many measures are more expensive than they have ever been. More on this later, but we have already explored this topic in recent blogs.
The bottom line
All in all, order has so far been the rule in this immediate post–election environment. That is the way it is supposed to be during elections and it is gratifying to see that, even in this age of great political polarization, the system can function as it was designed to function. Let’s hope that sense of order and calm continues. The market certainly has expressed its happiness with the story so far and appears to initially be happy with what it sees coming down the road.