Today's post-election session featured a broad-based rally of over 2% in the major indices. Meanwhile, volatility eased considerably and the 10-year Treasury yield rose above 3.2%.
Markets stage one of year’s biggest rallies after midterms divide power in Washington
S&P 500 closes above 2800 for first time in nearly a month, and moves above 200-day average
Every sector rises, along with 29 of 30 DJIA stocks, as pent-up demand seems to take hold
(Wednesday Market Close) Some of the uncertainty dogging Wall Street blew away Wednesday like so many leftover yard signs. With voting in the rear-view mirror, the market staged one of its biggest celebrations of the year.
This was an impressive, broad-based rally that embraced every sector and all the major indices. The Dow Jones Industrial Average ($DJI) rolled up a better than 500-point gain, while the S&P 500 (SPX) and Nasdaq also posted big gains of better than 2%. For those who watch, it might be worth noting that Wednesday’s action took the SPX well above its 200-day moving average of around 2765 for the first time in several weeks. That could be a positive technical indicator moving forward.
The rally even included some sectors that came under scrutiny after Democrats took the House of Representatives Tuesday for the first time in eight years. For instance, health care stocks were among the leaders Wednesday despite some analysts getting concerned that more Democratic control in Washington, D.C., might lead to increased pricing pressure on drug companies. Health care had actually come under pressure overnight in Europe when it became clear Democrats would run the House. Still, the sector moved higher, perhaps drawing some continued strength from Eli Lilly’s (LLY) strong earnings and guidance Tuesday.
Financials were another sector some analysts thought might struggle with Democrats back in charge of House committees. If you think back to the last time Democrats held the House between 2007 and 2011, a lot of tough banking regulation came down the pike. Still, the sector pushed through solidly on Wednesday. Some technical buying might have helped both pharma and financial stocks, as shorts might have started giving up on their positions late in the session after the S&P 500 (SPX) pushed above the psychological 2800 mark. Wednesday’s close was the first above 2800 since Oct. 9, nearly a month ago.
These rallies in financials and health care in spite of possible political headwinds just help show the strength of Wednesday’s optimism. Judging from the big drop in volatility, it seems like there might be less concern about the path ahead. That said, the 17% drop in VIX today to under 17, from highs above 25 last week, might end up proving to be a bit overdone.
Still, it’s hard to argue with some of strong spirits on Wall Street today. Rallies of better than 2.5% in tech and consumer discretionary could point to investor optimism ahead of the holiday season. The FAANGs seemed to be a nice beneficiary of this, with Amazon (AMZN) getting a nearly 7% boost that wiped away a decent amount of the stock’s recent sharp losses. Apple (AAPL) climbed more than 3% back to nearly $210 a share after plunging below $200 last week amid what many saw as the company’s soft outlook for the holiday quarter. We’re just two weeks out from Black Friday, so maybe some of the discretionary names are starting to ride into that traditionally huge shopping day. Also, the tech sector has traditionally benefited from a divided Congress, though we’ll have to wait and see if that holds true again.
One more thought about discretionary and Communication Services (“Comm-serves”), which AMZN and Alphabet (GOOG, GOOGL) call home: The Democrats’ win on Tuesday might have taken some pressure off of these companies from earlier this week when President Trump had mentioned possible antitrust issues. A divided Congress doesn’t make that issue go away, necessarily, but it does cut back on the president’s power to some degree, and a lot of powerful Democrats come from areas where big tech have their headquarters. Just something to consider.
In the DJIA, 29 of 30 shares advanced Wednesday, led by gains from some of the major industrial, tech, energy, and health care names. Some of the DJIA stocks other than AAPL climbing more than 3% included UnitedHealth (UNH), Microsoft (MSFT), Intel (INTC), DowDupont (DWDP), Caterpillar (CAT), Cisco (CSCO), Pfizer (PFE), and 3M (MMM). That’s quite a mix of personalities, and helps show how broad-based this move was (see figure 1 below).
Not only was the rally good, but it came on good volume. It’s the first time we’ve seen a strong rally on high volume in a while, and could reflect pent-up demand. It’s possible some investors were waiting to see the election results before getting back in.
History shows that markets tend to rally after midterms, and that might also be a factor influencing investors. However, it’s probably best to remember that past performance doesn’t guarantee anything about the future.
Speaking of the future, some speculation developed Wednesday about future trade relations with China, and that might also have played into the market’s rally. One school of thought suggests that President Trump might now feel more pressure to get a deal done with China between now and the new year, when his party loses full control of Congress. It’s a bit surprising to see such a huge rally with tariffs still hanging over the markets, but perhaps this theory helped out. It’s still a long time until President Trump and Chinese President Xi meet at the end of this month, so the story could have a lot of chapters left.
Another factor that might be helping stocks this week is the continued pressure on crude oil, which comes mainly from growing supplies in a season where demand typically drops. U.S. crude closed below $62 a barrel at an eight-month low as U.S. production hit a new record. The close trading between crude and stocks that we cited earlier this week got broken up in a big way Wednesday. Though lower crude sometimes hurts energy stocks, it can act like a tailwind for many other companies that rely on cheap energy supplies.
Going into tomorrow, the question is whether momentum can continue. A lot of the power on Wednesday came from the FAANGs, and those are momentum stocks. It’s impossible to predict what might happen between now and the morning, but the strong FAANG showing could potentially keep momentum from slowing too much.
FIGURE 1:ELECTION BREAKOUT. The major indices were solidly in the green post-election, extending gains from earlier in the week. The Dow Jones Industrial Average ($DJI) crossed its 200-day moving average Monday and has since not looked back. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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