Before The Bell
A massive comeback has taken place in the stock market this week, with stellar gains in place just before this past Tuesday's consequential election, on Election Day itself, and during the immediate aftermath of that contest – which, even as we write this, is still in some doubt. The strength follows a two-month selloff in the stock market and the worst five-day stretch for Wall Street since this past March. Clearly, the election and the likelihood of divided government ensuing from it are contributing factors to this advance. Let's look at what is going on.
Tuesday's election is still up in the air to some extent. At this point, former Vice President Joe Biden is closing in on the Presidency and the odds would seem to highly favor his ascendancy to President-Elect status in the coming days, notwithstanding presumptive challenges by the President and his legal team. The House will stay in Democratic hands, albeit with a lesser majority, while the Senate still is in limbo, but tilting toward retention by the Republicans, with, perhaps a razor-thin edge. For now, two Senate runoffs are seemingly ahead, which will leave the numbers in doubt until January.
What could well be the implications of this expected political makeup? For openers, a needed stimulus bill should pass, but it may be a more targeted package with a smaller final tab. Other changes arising from a presumptive Biden Administration would be a perhaps “tighter” approach to the coronavirus (depending on whether the current rate of spread continues), more emphasis on climate issues, with the Paris accord renewed, and somewhat lower defense spending. A de-emphasis on oil, fracking, and other fossil fuels, is likely.
As for the market, it again went straight up yesterday and these gains have rendered the indexes somewhat overbought once again, just after we had been on the cusp of a correction. Why is there this big change in sentiment? Clearly the Street likes the idea of divided government, that is, a President of one political party and at least one chamber of Congress in the hands of another. That, as noted, now seems likely. However, until everything sorts out, there are no certain answers and many questions.
Returning to the market, stocks continued to press higher, with the Dow Jones Industrial Average moving back comfortably above 28,000. The NASDAQ did even better, proportionately, as Qualcomm (QCOM) enjoyed its best day in several months on a big quarterly beat and positive outlook. Dow component Verizon (VZ) also did well on an investment house upgrade. Returning to tech, the prospect for divided government will lessen the chances for regulation in the areas of social media and the Internet, and that could be a big plus for some high-profile companies in this space.
In other news, the Federal Reserve concluded its latest FOMC meeting with no change in its support on the monetary front, while the Labor Department has issued its monthly data on employment and unemployment. In that issuance, the government noted that non-farm payrolls had increased by 638,000, while the unemployment rate, expected to ease to 7.7%, actually fell to 6.9%. Finally, the labor-force participation rate came in at 61.7% and average hourly wages ticked up by 0.1%, or half the expectation. On balance, it was a solid report.
So, here is where we are, as the hours tick down and no definitive verdict on the political front is rendered. In fact, it could be days or even weeks yet before all sides reach a common understanding. Should that standoff persist for weeks, there could come a point in which the stock market takes a second, and more critical, look. For now, though, the bulls like what they see and the old adage of not fighting the tape is in vogue. Investors, though, should stay vigilant, especially as the market has come far in a relatively short span of time.
As to the futures, the stock markets poised to show little movement of note at the open following the strong bullish action to date this week
– Harvey S. Katz, CFA
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
