Market pundits are digesting the Presidential debate and Hunter Biden news this morning but the only major impact on the market at this point is that the election is likely to tighten in the next 10 days. The likelihood that there will be no clear winner on election night is probably increasing and there is no doubt that we will be subjected to increasingly intent political arguments.
In the short term, the fiscal sentiment negotiations will continue to move the market. News yesterday of some progress between Pelosi and Mnuchin helped to boost the market after a shaky start but there still is more work to do and it is unclear what Senate Republicans will be willing to accept. We will be subjected to more headlines today but the market is expecting a deal sooner or later.
With an uncertain election looming, a fiscal stimulus deal will hold the danger of triggering a 'sell the news' reaction. The news is being priced into the market as the indices continue to perk up and expectations increase. An actual deal will likely trigger a market surge but the big problem is that a surge will be used as an opportunity to reduce positions as we head into the election.
The danger of the election initially isn't whether Trump or Biden wins but whether there is a clear winner, and then secondarily whether there is gridlock or not. Many market players will likely look to move to the sidelines until there is great clarity and a spike on a fiscal stimulus deal would be an ideal opportunity to do so.
The biggest positive that is going on right now is that there continues to be a focus on individual stocks. Yesterday small caps outperformed and breadth was around 2 to 1 positive. This tells us that this is not just index driven action but stock picking action. Market players are looking for good values and technical setups and aren't just throwing capital at the market out of fear of missing out.
There has been a good amount of rotational action lately which is also reflective of the desire to pick stocks rather than time the indices. That bodes well for the future once we move through the volatility created by the election.
I remain positive about the market but will be watching closely for a 'sell the news' reaction as we move closer to the election. There are quite a few stocks I like into earnings but there is more random volatility in some extended names as market players move to protect recent gains.
We have a positive start on the way but watch for the fiscal stimulus headlines again.