Before The Bell
Under a cloud of uncertainty from election night, in which a winner was not determined in the U.S. Presidential race, the major equity averages recorded significant gains yesterday. The bulls were in control from start to finish, but the indexes, most notably the Dow Jones Industrial Average, ended the session off their intra-day highs but still with sizable advances.
Historically, the investment community frowns on uncertainty, but sentiment did exist (and still does) that Tuesday’s night elections would lead to Joe Biden winning the White House and the GOP retaining control of the Senate. Investors believe that the likely gridlock to emerge in Washington D.C. would lead to a status quo on many issues, ultimately preserving the corporate tax cuts from the 2017 Tax Cuts and Jobs Act and resulting in less regulations than initially expected, both of which are seen as popular developments for American corporations.
The move higher was led by the technology stocks, which was the primary reason for the outsized gains on the NASDAQ. The tech-heavy composite surged more than 3.8% for its best session since April, as nervous investors that rotated out of some of the high-growth areas in the weeks heading into Election Day returned to the sector in a big way. There is a belief among investors that the high-growth technology companies will flourish from an operating standpoint no matter what policies are in place on Capitol Hill. Likewise, the health care stocks fared very well yesterday, with the likely Republican-led Senate assuring that there will not be a push for government-run universal healthcare for all, a policy change pushed by some that would prove very costly for healthcare providers and insurance companies. On a separate note, shares of Biogen (BIIB) skyrocketed in early afternoon trading after news surfaced that a Food and Drug Administration advisory committee could potentially recommend approval of a controversial Alzheimer's treatment called aducanumab.
That said, it was not an all-encompassing rally on Wall Street yesterday, as there was some rotation out of the safe-haven groups. It also was a disappointing day for bank stocks, which fell along with Treasury yields, as investors anticipate less government spending and a smaller coronavirus fiscal stimulus package from Capitol Hill.
Looking ahead to the new day, one question investors will be asking is what would a possible contested presidential election mean for the near-term performance of the U.S. equity market? At least initially, it looks like the market will handle it better than it did 20 years ago. The 2000 recount in the Bush versus Gore election—a tight race in Florida left the nation without a clear winner for over 30 days—led to a spike in the CBOE Volatility Index (VIX) and a sharp drop in the S&P 500 Index. The VIX actually fell nearly 25% during yesterday’s bullish session for equities.
So far the world equity markets are looking past the uncertainty surrounding the U.S. elections; the Trump Administration has filed lawsuit in several battleground states. As noted, the hope on Wall Street is that the possible gridlock on Capitol Hill would led to a continuation of some of the business friendly policies that are deemed to be both good for Main Street and Wall Street. The corporate tax rate remaining at 21% would continue to support earnings growth at many U.S. corporations.
Before the market’s open, the equity futures point to a continuation of some heavy buying on Wall Street. Investors both here and abroad appear to be looking beyond the continued spike in coronavirus cases around the globe, which has led to shutdowns in several European nations. The main indexes in Asia, mostly notably Hong Kong’s Hang Seng Index, finished sharply higher overnight, while the main European bourses are well into positive territory, as trading moves into the second half of the session on the Continent. This comes after the European Central Bank decided to hold short-term interest rates steady. Like yesterday, investors are showing an appetite for riskier assets and their preferred destination again appears to be the technology and healthcare areas. Stay tuned.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
