No Matter The Election Result, The Fed Chair Is King

We really can’t call it ‘the day after the Presidential election.’ Counts continue, and the lawsuits are just warming up. But a big concern of Wall Street was answered, and that’s why the stock market enjoyed a strong session.

Yesterday, the stock market made a big move because the Republicans held onto control of the Senate and even gained seats in the House. Even as the White House prepares to contest parts of the process, President Trump performed so much better than expected, denying Joe Biden the opportunity to claim mandates for the more economically dangerous components of his agenda.

I’m referring, of course, to the most draconian and socialist tendencies of Biden & Co and the pressure he would have received from the far left. By the way, just because Joe Biden is not as radical as Representative Ocasio-Cortez, his campaign rhetoric is a multi-trillion pipe dream to build a utopia powered by solar and wind energy. 

Other than that, his promises are vague on specifics but involve taking giant gobs of money from rich people (anyone earning more than $400,000 a year, including small businesses). He’s grinding it through the government machine, as the crumbs and pixie dust that comes out the other end will be distributed to folks left behind based on his tax plans. 

I have no idea how much it all costs, but the Urban Brookings Institute modeled his proposed tax plan to raise it by only $2.4 trillion when he clearly stated he needs at least $4 trillion. That means higher business taxes, and that means fewer jobs and less investment. The GOP Senate will build a moat around the grandiose schemes, and this is why investors should remain invested in the stock market.

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If we end up with President Biden, he will have the power of the pen, which means more executive orders, but things such as higher capital gains tax rates are off the table, hence yesterday’s sigh of a relief rally. 

When I say, “invested in the market,” it doesn’t mean you have to always be 100% vested, and it doesn’t mean you cannot ring up profits and be proactive. But sitting on the sidelines, as the United States inevitably climbs out of its Covid-19 fog, adds more stimulus, and has trillions in dry powder, would be a huge mistake.

2021 could be a huge year for the economy and stock market, but I think it will be a very selective market as well. Yesterday is a perfect example, as there were 268 losers on the S&P 500 and only 236 winners.

Retreat to Winners

It’s rare to see the S&P 500 up more than 2% in a single session and have four sectors that are not only down; but off more than 1% point. 

Many of this week’s winners are companies that posted strong financial results, beating on the top and bottom lines, and most offered guidance above Wall Street’s consensus. But they were slammed in an environment of selling, stoked mostly out of fear of a Democrat ‘Blue Wave’.

I want to look at the sectors that got hit yesterday because some of the selling was overdone. Materials were slammed, as conventional wisdom shifted to the notion a massive infrastructure project would be put off or never come to fruition. I still think Materials are going to fare well with the housing boom and as the manufacturing renaissance reignites. I loved the action in Sherwin-Williams (SHW).

Industrials were lower, but defense contractors rallied, which goes against the idea their budgets would be sacrificed to focus more funding on domestic spending. I think it was also interesting that Utilities was hit when many zeroed in on the sector as a Biden Sector ahead of the election.  

Then there are Financials, dragged lower by regional banks that were looking very attractive.

The Man Who Would Be King

Why Fed Chairman Jerome Powell is the Winner, No Matter the Election Results

Federal Reserve Chairman Jerome “Jay” Powell graced the cover of Barron’s magazine with the claim that he is the winner, no matter what the election results.

Unlike the President of the United States, Jerome Powell can pull trillions out of thin air without engaging in a tug-of-war with political rivals. There used to be laws of diminishing returns, logic, and the threat of runaway inflation, but not anymore. Make no mistake. The Fed is in an awkward position to find new accommodation tricks.

Two of the last three Federal Open Market Committee (FOMC) meetings saw the market rally until 2:35 p.m. when Powell began his question-and-answer period. It was clear the Feds didn’t have a plan.

• June 10^th: the S&P hit an intraday high of 3,223, then tumbled to close at 3,190.
• September 16^th:: the S&P hit 3,428, then plunged into a free fall to close at 3,385.

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Today’s Session

The manic rally in the market is the exact opposite of the rapid decline in the so-called fear index.  There is no doubt the market is thrilled the GOP will control the Senate, but the slide in the VIX also suggests that despite early pushback, ultimately there will not be a contested election.

Powell at the Bat

Of course, the big move in the market and sigh of relief could reverse very quickly if the Federal Reserve does not impress Wall Street today.  Jay Powell must give details on the type and amount of additional accommodation its prepared to immediately implement.

The Fed will be under additional pressure after the ECB added additional stimulus.  That move was taken hand and hand with the UK government extending 80% supplemental wage assistance for furloughed workers.

The Election

Also during the session, there will be updates on the election with an intense focus on Georgia and Arizona. 

Earnings

The focus is back on earnings reports, including those from prior weeks that were lost in the noise of Covid19 headlines and election angst.  There are a ton of major earnings beat this morning.  Check out results for General Motors (GM), which has returned to a role as economic proxy. 

Initial Jobless Claims

Initial claims came in slight less than expected, as it matched the level of last week of 751,000. This is down a lot from where we were, but it is still disheartening.

To see the chart, click here.