Election day started with stocks continuing Monday’s rally and some risk indicators stepping back. Volume has been thin, and it’s hard to imagine many people wanting to jump in and take a big stand with election results around the corner.
Rally spills over into Election Day despite concerns about a close or contested result
Profit-taking still possible as traders position themselves ahead of the vote tally
Risk-on environment prevailing for now as volatility, bonds step back slightly
(Tuesday Market Open) Depending on how things go tonight, we could be witnessing the calm before the storm.
What’s interesting as the country’s momentous day begins is that the “horsemen of risk” aren’t really charging out of the gate. Gold is up a little, but bonds and volatility are both lower and Monday’s stock market rally continued overnight. The relaxed approach so far might reflect widespread market belief that once the election is over, fiscal stimulus hopes could reignite. The market is basically saying that whoever gets in, it will be comfortable, and that the winner—whoever it is—is likely to spend money.
Though Wall Street is rallying now, it’s gone up and down a lot lately, so there’s no guarantee of early strength lasting. Volume has been thin lately and remains that way, and when volume is low it’s easier to push things around. It’s unlikely, though, that we’ll see people step in and take a big stand right here ahead of the election.
Election results should begin flowing a few hours after the closing bell, and the action will play out in the futures market this evening, overnight, and possibly into tomorrow morning depending on the vote count. We’ll all be glued to our television sets and the internet starting after 4 p.m. ET, and could see results from eastern states within a few hours of that, if things go like they often do.
Investors and traders, like everyone, should consider being wary of any early election calls. That’s especially true if you’re trading the overnight market. We’ve seen states and even the national election get called one way before being called the other—think back to the 2000 election, in particular.
It’s not all about the election today. There also are some earnings. Wayfair (W) destroyed the Street’s expectations, and shares are up 8% in pre-market trading. The online furniture company appeared to benefit from the “stay at home” trend where people stuck working from home decided to spruce up their space. PayPal (PYPL), however, is down 5% early Tuesday, thanks in part to investor disappointment over the company’s guidance.
Ferrari (RACE) shares zoomed up this morning after a bottom-line beat for the iconic car company. Tomorrow’s a big earnings day for the hotel, restaurant, and resort sectors, so stay tuned.
What’s going to be interesting is whether a few of those eastern states like Florida, Georgia, and North Carolina get their votes tallied quickly and show any emerging trends. For instance, early signs of “blue” strength in those states might take away some drama later as votes from states in the Upper Midwest get counted. However, if Florida is close and takes longer to call, or if it goes “red,” drama could tick up as people await later results from Pennsylvania, Michigan, and Wisconsin. That’s according to political experts quoted in the media, by the way.
Speaking of which, many election experts tell people not to necessarily expect final results at least until Wednesday or maybe even later. Any kind of delay raises uncertainty, which could mean a race up the volatility ladder. The Cboe Volatility Index (VIX), sometimes thought of as the market’s “fear index,” could be as good a barometer as any out there on chances of a delayed outcome. We saw that in 2016 when VIX spiraled higher in the midnight hour as a jump ball seemed likely. Then it unwound and stocks rebounded as a victor emerged more quickly than some had expected.
VIX stepped back a little on Monday, but not very far. It’s still above 35, near the four-month high posted late last week. An elevated VIX and a rally in stocks happening together is far from unprecedented, but often ends in one or the other getting a ticket to “palooka-ville,” to quote the old movie.
With bonds and VIX down so far today, relationships are more in line with historic norms than we’ve often seen recently. Volatility and bonds often tend to sink when stocks rise.
Whoever wins today (or whenever we find out) may be less material for the market—at least in the near term—than a delayed result. The thinking on Wall Street appears to be that either Trump’s re-election or the election of Biden is likely to get Washington on a new spending spree.
Also, as noted here over the last few weeks, some of the S&P sectors most likely to reflect politics include Energy, Health Care, and Financials. Check our November Market Outlook for more of my insight on the whys and hows of potential post-election sector trends.
If there’s chaos after the vote, it wouldn’t be surprising to see investors pile back into the “horsemen of risk,” including VIX, fixed income, and gold. Remember the crazy ups and downs in stock futures on election night 2016?
As an investor, you’ll probably want to have one eye on the election returns and another on the markets tonight, and remember, there’s no need to necessarily jump right in. Sometimes it’s better to let things settle a bit and know the facts before getting your feet wet. There is some established thinking on how to approach election nights.
If you like to trade aggressively as news happens and feel tempted to have a go Tuesday night or Wednesday, consider keeping your trade sizes smaller than normal and think of what you might do outside of stocks to hedge a stock market position that goes against you. Gold and volatility hedges sometimes gain popularity around an election. So do options strategies.
Monday’s impressive rally probably indicated, at least to some extent, relief that we’re finally almost done with this thing and enthusiasm that whoever wins is likely to spend. There also might be a little less fear out there about a prolonged post-election battle over the votes, with recent polls not looking all that close. Not that polls are always right, of course, as anyone here in 2016 remembers.
“Reopening” stocks delivered some of Monday’s best performances, helped in part by a triple-play of firm economic data. Besides strong manufacturing numbers (see more below), construction spending had its good aspects, and so did Friday’s Chicago PMI report. What all this might tell us is that the economy is really starting to pick up steam, even with many states experiencing a heavier virus caseload.
The beaten-down Energy sector featured strong performances Monday, including from Exxon Mobil (XOM) and Chevron (CVX), as crude prices bounced back a bit from overnight weakness. The crude strength might be partially explained by those impressive economic numbers. The data might also have helped Mohawk (MHK), a manufacturing firm which produces floor covering products for residential and commercial use. Shares surged 11%.
Bonds kind of marched in place, with a relatively stable 10-year yield weighing in at 0.85%. That’s on the upper side of the recent range. The yield ticked up to 0.87% early Tuesday, near a four-month high.
CHART OF THE DAY: MATERIAL PROGRESS: Say, is that the Materials sector (IXB—purple line) achieving a little momentum here? It’s definitely outpacing Technology (IXT—candlestick) over the last week or so. This could be a sign of people taking profit after the long Tech rally, or it could reflect more interest in Materials on signs of strong U.S. economic data. 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.
Payrolls Preview: If you can look beyond the election (which is hard), consider that even if voting weren’t happening today it would still be a busy week on Wall Street. The keystone is Friday morning when October payrolls data bow. The average analyst estimate is for headline jobs growth of 570,000, down from 661,000 in September, according to research firm Briefing.com. Analysts do see the unemployment rate ticking a bit lower, to 7.7%, from the previous 7.9%. But that could raise more questions about the employment situation than it answers (see more below).
Assuming analysts are right, 570,000 would still be historically strong, but well below growth of above one million a month recorded right after the pandemic’s early impact diminished. A beat on the headline number sometimes can give the stock market a little fresh tailwind, but we’ll have to wait and see.
Data Lifts Job Hopes: One possible source of optimism ahead of payrolls did pop up early Monday when the monthly ISM Manufacturing Index for October surpassed expectations at 59.3%, a two-year high. The most impressive thing about that report was new orders, which reached a 16-year high, suggesting there’s plenty of demand getting stirred for durable manufactured goods. Still, in a separate report, construction spending in September grew only a bit and missed the Street’s projections.
The twist with the construction numbers was more strength in non-residential, which could be a bright spot. That part of the construction market had been flagging since the pandemic struck, hurt by companies worried about weak demand and employees working from home. If companies are starting to invest in new infrastructure, perhaps that’s a sign that they see normal times returning more quickly once there’s a vaccine. Generally, construction and manufacturing jobs are two areas that haven’t grown as fast as some economists had hoped in recent months, so investors should consider keeping a close eye on those components when the report comes out.
Payrolls—Beyond the Headlines: Monthly jobs growth has steadily dialed down since last summer, with each month lower than the last, starting in July. That’s three months of declines in a row, which has some analysts wondering if that initial government stimulus was responsible for much of the early hiring. Most of that money is gone and it appears nothing new is on the way possibly until the new year.
While unemployment dropped to 7.9% from 8.4% in September, the labor force participation rate fell to 61.4% from 61.7%. Additionally, research firm Briefing.com pointed out, the pace of job growth slowed considerably, the percentage of employees unemployed for 27 weeks or more rose considerably, and there was hardly any growth in average hourly earnings. All those metrics get updated for October and arguably deserve a close look Friday to see if things got better.
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