To look at the reaction to this French election, you would think Wall Street intersects with the Champs-Elysees, and that's the Eiffel Tower we see from Lower Manhattan, not the Statue of liberty. But that's how big gains can occur.
Now, though, let's get serious about what it all means.
First, as much as we would like not to be linked to Europe, there are enough entanglements that it can spur a rally here. With the French bourse zooming 4%, taking the Euro Stoxx 50 with it, closing up 3.99%, we are going to feel some of that love across the Atlantic.
It's fair to ask, though, is there any real linkage? The answer is a resounding yes: If the extremist candidates from both sides had made it to the runoff, instead of just Marine Le Pen from the nationalist right, there would have been a flight to quality out of Europe into our markets and our interest rates would have gone down, which, we know, automatically triggers stock selling.
Further, the dollar would have gone way up on demand for a steadier currency than a shaky euro, under attack from the extreme French left and right, which would have hurt our international companies, the ones that are based here but sell there, because a weak euro makes for a terrible translation back into dollars. Instead, now with a centrist, Emmanuel Macron, as a heavy favorite, the euro's strong and looks to get stronger.
Otherwise the principal positive impact for us came from the hedge funds betting against our stocks because they wanted to profit from the possibility that Macron wouldn't make the May 7 runoff. Their reversal of their bets, whether it be from shorting the S&P 500 or puts bought against the index or select stocks, causes upward pressure when they are unwound.
It's important to point out, by the way, that with these moves, many of the European bourses are outperforming the S&P 500, even when you account for the currency weakness. Should we be talking about a Trump discount rather than a Trump bump? Probably unfair, but ever since the defeat of the repeal-and-replace movement for Obamacare, we've been twiddling thumbs here until today.
For the moment, let's play out what's allowing our markets to fly: earnings, specifically better-than-expected earnings from a host of companies, as well as continued merger activity that kind of takes your breath away.
Take Sunday. I sent a memo to the staff of Mad Money with ideas for what we should be focusing on for the week. I do it after I look at the charts sent to me from the Standard & Poor's. My seventh suggestion sent at 1:28 p.m. ET was, "How come Bard (BCR) never comes down?"
We got our answer at 5 p.m.: because there's a suitor for the company, Becton Dickinson (BDX) , which is buying it for $24 billion. Both companies sell into hospitals. Both companies are headquartered pretty near each other. You can only imagine how much better the combined company can service hospitals, which is exactly what they want, fewer vendors. Becton Dickinson's paying a pretty penny for it, but it is a reminder that on Friday C.R. Bard may seem to have been expensive, as so many pundits tell us about so many stocks, but on Monday you picked up 50 points for doing nothing other than owning the stock. You know, I have a problem with these organizations that tell us to worry about single-stock risk. I like to focus on single-stock reward, like the 20% gain you got this morning and the 35% you've made this year.
Please don't be brainwashed into thinking stocks are dangerous per se. That's just not a fair way to look at the possibilities that can await you provided you manage your own diversified portfolio that starts with a low-cost index fund, preferably the S&P 500.
Next, let's talk earnings. Tonight on Mad Money we will hear from the CEOs of two companies that reported numbers so extraordinary that their stocks are roaring: Hasbro (HAS) , the entertainment company, and Illinois Tool Works (ITW) , the manufacturer of a host of key parts and machines that dominate whole industries.
Notice I called Hasbro an entertainment company, not a toy company. Mattel (MAT) , which reported a very disappointing quarter, is a toy company. Hasbro is an experiential enterprise that sells games and toys to people who often want a total experience related to a movie or a television show.
Why is this so important? Because of the mechanics of money management. So many hedge funds think Mattel's the same as Hasbro, so they placed wagers against Hasbro, hence the exacerbated upside when those wrong wagers were unwound.
Illinois Tool Works, we have often pointed out, is the best-run industrial you have never heard of. The company not only printed a number this morning that was much better than expected, with much better margins and much stronger earnings, but it defied all the conventional wisdom of how an industrial can do so well in this sluggish economy. In particular, it defied the sell recommendation that Goldman Sachs had put on it back on Feb. 17 when the stock was at $130, saying it would go to $121 because, while it is a solid franchise, it's "not in the sweet spot." The analyst, whose name I will spare, said margin upside is limited and the company's stock is elevated.
The stock's now at $140. Oh well. Something ventured. A lot lost.
Then we have the phenomenon of companies that reported remarkable numbers in the last few weeks but we chose to ignore them or view their earnings surprises tepidly simply because they reported ahead of the French election. Honeywell's (HON) quarter had remarkable cash flow generation but it had the misfortune of reporting Friday. Today its stock is screaming higher. Similarly, the banks have consistently beaten the estimates, most recently an astounding performance by KeyCorp (KEY) , an Action Alerts PLUS name, run by Beth Mooney. Today the stock got its due.
Finally, the positives that are in front of our faces in the semiconductors, namely the big builds for both Apple (AAPL) and Samsung cellphones, were subdued because of worries about France. Unshackled, we got quite a run in Skyworks (SWKS) , Broadcom (AVGO) , Analog Devices (ADI) , Texas Instruments (TXN) and, perhaps most important, Xilinx (XLNX) , which I suggested last week on Mad Money should be bought because of its strong fundamentals and because of what might be a bid by Broadcom. Two research firms recommended Xilinx today based on the fundies. I still think the bid could occur; you can win either way.
Notice I have completely skipped over what so many are focused on: President Trump and his attempts to get some tax reform done that would be bigger "than any tax cut ever." We know the president intends to unveil his plan on Wednesday. I think there are so many commentators out there saying this rally is about those cuts that I have to call timeout and tell you that's not the real driver of this big move.
I believe the president can perform tremendous wonders for the business community by changing regulations. In fact, I think deregulation in the banking and the oil and gas industries has already made a difference in the fortunes of these companies.
But there is little hope for "the biggest tax cut ever" because the House of Representatives, led by Speaker Paul Ryan, has no desire to give the people that sort of windfall. So let's be cognizant that those commentators who want to hang this rally on Wednesday's announcement are creating the potential for failure by raising the bar way too high. They must be short the market.
It's fair to say we got a rally today because France didn't implode, allowing good corporate news that had been obscured by foreign entanglements to shine through. If Trump gets anything done, terrific, but stop banking on it if it involves Congress. You're just setting your portfolio up for failure instead of looking at the main chance, the phenomenal performance of U.S. companies in the face of tremendous uncertainty both here and abroad.
