Five Market Facts
Some quick reminders before we get into it since there are more of you reading this now than there were last week. First, this is my diary on the market. It is in no way shape or form investment advice. These are the conversations that I am having with myself as I take in all that is happening in the market while trying to square it with the prevailing narratives and fundamentals. I do this to give some clarity to my thoughts. If you like what you are reading, please consider passing it along to others who might like it as well.
Next, if you have an opinion, I would love to hear it, especially if you disagree with something that I am thinking. I promise you that after starting in this business as a summer intern at the New York Stock Exchange when I was 16 years old, I have extremely thick skin.
Over the weekend, we found out who will likely be occupying the Oval Office in January. Vice President Biden has been declared the winner and based on the few social media platforms that I follow, it is safe to say that the there are many people who are happy and many who are upset. I am looking at things from the perspective of the markets. The market does not care about our political views. Most importantly, I am looking at the facts as I see them on the charts.
My initial view is that thus far the outcome of the 2020 election is a bullish set-up for equity investors. This is largely based on the prospects of a split government. I wrote last week, how this likely dampens the prospects for dramatic changes to the status quo as it relates to taxes and the regulatory environment. Initial views are subject to change at any moment as the facts and the trends change but the simple fact of the matter, as I pour over hundreds of charts this weekend, is that the major trends are up for equities. And, if markets are forward looking, they don’t see some draconian event on the horizon, at least not yet.
On a closing basis, the iShares Russell 3000 ETF (IWV) ended the day Friday at an all-time closing high. It traded at a higher price in early September but based strictly on where the fund closed the week, we have never been higher. This fund represents about 95% of the market cap of companies listed in the Untied States and turned in a strong performance last week, especially as the prospects for a divided government became the prevailing view. Fact: The Russell 3000 closed at an all-time weekly high.
Some areas of the market performed better than others but the general mood was bullish for equities. The Nasdaq was a clear bright spot and the ETF which tracks its largest companies, the Invesco QQQ Trust (QQQ), closed at a new weekly all-time high as well. Again, we can point to the prospects of a split government as a rational for this move. Perhaps the regulatory environment will be less hostile for the likes of Facebook, Apple, Google (I refuse to call them Alphabet) and Amazon. Perhaps. Fact: The Nasdaq 100 closed at a new weekly, all-time high.
The movements in interest rates were more interesting in my opinion and likely paint a clearer picture of what is happening in the economy. The 10-year treasury yield, which is used as a reference point for the majority of the rates that we see in our daily lives (mortgages, credit cards, etc…) moved lower on the week. Again, we can thank the prospects for a split government. The general thinking here is that with a divided government, any stimulus bill will likely be smaller than what was priced into the market. Lawmakers are already making plans to come back to the table in the weeks leading up to the end of the year to discuss a “skinny” deal, based on this article. If a deal is smaller than expected, that is likely to keep rates low as there will probably be less borrowing on the part of the government. Here is the 10-year yield with a strong move to the downside last week. Fact: Interest rates are low.
Some will point out that the case for a smaller bill was made stronger on Friday when we learned that the economy added 638,000 jobs in October which was better than the expectation of 580,000. At the same time, the unemployment rate fell to 6.9%. This data prompted Senate Majority Leader McConnell to highlight the dramatic comeback of the economy since the depths of the COVID crisis. Here is a chart from KOYFIN showing the decline in unemployment over the past few months. Fact: The unemployment rate is improving.
The election was not the only thing that investors had to contend with last week. The Federal Reserve met to discuss interest rate policy. They did not make any changes and none were expected but, with the prospects for a smaller fiscal bill growing, more attention is being directed at the Fed. Investors generally believe that Fed policy will remain accommodative which should continue to help equity markets, while keeping rates from rising much beyond the level seen prior to the COVID crisis. Here is a look at the assets on the Fed’s books. Fact: The Federal Reserve has been accommodative.
I have no idea how the next four days are are going to play out let along the next four years. I have no idea what policy shifts are likely to take place. I don’t know how investors are going to react to them when they do. In two years, there will be mid-term elections, I can’t even venture a guess at how they will go. What I do know are the facts and those are what I will continue to use to drive my views. Here is what else I know. All of the trends on the charts above were in place BEFORE we heard the results of the election on Saturday. Here’s the best part, if the facts begin to change, I will see it on these same charts, that I look at everyday!
As a reminder, I write a more in depth research note every trading day. You can give it a try here: