It seems nuts. How can you have a mini-bear market and then a resumption of a bull market within a 24-hour period?
Yet that's almost exactly what we had when you consider that last night at 12:45 a.m. ET the S&P futures were indicated down limit, and a back-of-the-envelope calculation by me came back with a roughly 7% decline, a decline that was unrealized and then tossed aside when the day dawned and grew light.
I know you are puzzled. I know it is hard to believe that someone who was regarded as the enemy of the stock market can be embraced as an old friend by midmorning.
But I want to explain it all in plain English and put it into context that we can all understand.
To begin, though, you have to do something. You have to get into the heads of the people who actually bought stock today. That's the key to figuring out a rally that seems fanciful, absurd, if not totally nuts, but turns out to be anything but.
Let me list the types of buyers and their motivations.
The first buyers? The people who have been waiting for this gosh-darned election to end. These are people who recognize that the nastiest election in ages simply has to play out before capital can be committed. There are too many question marks, too much rancor and too much just plain old confusion and uncertainty to feel prudent pulling the trigger.
Call these people agnostic buyers. They were going to buy no matter who won. They just wanted to be sure the market wasn't going to crash after the results were reached. It pretty much did crash if you are one of those traders who sit around in your pajamas and dally with the futures like the total idiots I always call you. The people who sold everything last night, the people who said to sell everything, let's just say they aren't worth a bucket of warm spit, which happens to be the phrase that the legendary John Nance Garner, FDR's first vice president, used to describe that distinctly subservient job. I railed against these sell-everything folks for months, but obviously pajama traders don't listen.
Second group of buyers? Those who wanted to see a smooth transition. They wanted to hear graciousness from Donald Trump and from Hillary Clinton to continue the long tradition in this nation of a peaceful handoff no matter what. These people got instant gratification, the first at 2:30 a.m. ET, which must have really driven the PJ guys crazy, and then the second a little after 11 a.m. These buyers really bid everything up when they saw Trump wasn't wishing that Clinton ended in jail, but instead seemed to be inclined to send her back to Yale where she went to law school.
Third set of buyers? Those who actually see in Trump a business person who will cut taxes and borrow a ton of money to fix our nation's infrastructure. These buyers know Trump's comfortable with borrowing tons of money, even more than he can pay back if he has to. So why not do the same with the Treasury, given that 30-year rates are so cheap. The bond market traded today as if Trump's going to issue a $500 billion long-term bond to fund highways and bridges and tunnels, not unlike Dwight D. Eisenhower. The stocks I recommended yesterday, Martin Marietta Materials (MLM) and Vulcan Materials (VMC) , were among the leaders, so this theory jibes with both bonds and stocks.
Fourth group of buyers? The people who got this election wrong. No, not all the pollsters who, after this and Brexit, should have their licenses taken away. Bunch of clowns, if you ask me. No, I am talking about the short-sellers who, after FBI Director James Comey first damned Clinton with the Anthony Weiner emails and then exonerated her days later, felt that she was the biggest shoo-in since Richard Nixon's triumph in 1972.
Now if you are idly chitchatting about the pollsters and you got comfort in them if you liked Clinton, well, all power to you. But if you are a hedge fund manager and you saw these numbers, you would be inclined to bet that a combination of Clinton in the White House and, perhaps, a Democratic Senate majority would be the death knell for pharma of all kinds and banking. Why not? You know that these two are Public Enemy Nos. 1 and 2 in the Senate and it would be a decent sop for a magnanimous President Clinton to let Bernie Sanders and Elizabeth Warren roll all of these companies.
So you made gigantic short bets against them.
Now, at first, if you were betting against whole sectors of this market, you looked like you would be saved by the overnight futures. But once the smoke cleared and those guys took their lickings, you saw you had a major horror on your hands. You were looking good on your bank shorts initially because interest rates dropped as bonds were bid up on a flight to quality. But when we got a magnanimous handoff and a sense that Trump meant business when he wanted to borrow to build to make America great, you witnessed a stunning rise in rates, which is nirvana for the banks because they pay you little on your deposits but can invest them at very high and not-very-risky rates of return. Meanwhile, pharma bounced not only because the Republicans aren't going to rip into the drug companies (California's Proposition 61 on drug pricing lost, by the way), but they may celebrate their triumphs and allow them to repatriate their capital and start merging with each other.
Which brings me to the fifth set of buyers: those who like the idea that something can get done with corporate taxes to repatriate all of that money overseas, more than a trillion and half dollars, a lot of it in tech but a lot in drug stocks, too. That money flowing back means more buybacks, more dividends and more M&A, and if a Democrat was in the White House, it wasn't ever going to happen.
Sixth group? Those who believe that both the predatory nature of regulations and of foreign trade partners might at last have met its match. Plenty of our CEOs want China's market to be open to us, same with Europe. But others, taking their cue from the likes of Dan DiMicco, former CEO of steel giant Nucor (NUE) , believe that if we have a level playing field with our trade partners, we will all do better, including our internationally oriented companies. When it comes to regulation, what can I say: Part of Trump's emphasis is to disrupt the status quo and nothing resonates with the people like stopping regulation that hurts our jobs and our business, and here I am including everything from the Affordable Care Act to NAFTA.
There are plenty of executives who want to be able to build everything cheaper in Mexico, but they didn't have the votes. There are plenty of stock buyers who think American companies, if protected by our government from regulation and foreign predators, will have more profits and their stocks will go higher.
Finally, a seventh group just found tons of stocks they liked. We've been harping on defense. They had monster moves. Others want to invest in fossil fuels and feel less threatened than the EPA must feel right now. The pipeline companies in particular get a greenlight here. So did the coal-toting rails, with pro-coal stance being a Trump signature.
Then there are people who are willing to bet that Americans will be more inclined to go out and spend rather than sitting at home ordering Domino's Pizza (DPZ) while playing Grand Theft Auto or watching Netflix (NFLX) . Maybe people will fix up their homes again, ending the long slide in Home Depot (HD) . The refurbishment trade was resurrected.
There were enough of these to color the tape positively.
Now, let's be sure. The market's actions were erratic and minute-to-minute. There will be buyer's remorse for some, just like the seller's remorse for last night's heaving. But the simple fact is there were a heck of a lot more people who wanted in after this election than wanted out, and gigantic number of hedge funds who were on the wrong side of the trade and had to reverse their stance.
Together they produced an improbable rally. But then again, wasn't this whole darned election improbable? How fitting it ends this way.