We are still waiting for the Election 2020 results as six battleground states have yet to report their final verdict, but deja vu, just like 2016, the betting markets and polls got it entirely wrong. One wonders why they even exist. Over the past few weeks, the market was convinced a blue Democratic sweep would be the result and a near certainty of a $2.2 trillion stimulus bill for infrastructure. Overnight as Trump managed to win Florida, which was assumed to be a blue victory, and Texas, the betting markets shifted the 60/40 Biden victory to more like 60/40 for Trump! But what does that really mean for markets and asset classes?
The markets fell 8% these past few weeks in October, primarily as the Technology sector got slammed post record earnings and near 35%+ EPS year over year growth rates. It's a brave new world that saw massive profit taking as sector rotation forced fund managers to close out their Technology overweights and buy back their shorts in Cyclicals/Value oriented names. One of the main reasons for this was if Biden won, taking the Senate as well, the massive fiscal bill would boost infrastructure oriented stocks and sectors, like Copper/Construction/cyclically sensitive stocks as the economy bounced back. U.S. 10 year yields also reflected that view as they moved to 0.89% just last night prior to the vote count. Now that the Senate is definitely Republican and Trump potentially winning, at least not a clear-cut blue sweep, U.S. Bond yields have fallen back down to 0.76%, taking with it "cyclical rebound" hopes. This is why Copper and economically sensitive names fell early this morning.
Technology was sitting on its 100-day moving average, now as yields go back to 0.76% and lower, the old theme of chasing the defensives/growth oriented names returns. Ignoring the theme for now, this makes sense even from a fundamental point of view. Everyone is so fixated on trying to call the Presidency or the Dollar, they are ignoring the true genuine earnings growth apparent in these stocks that have tons of cash on their balance sheets and growing double digit. If one waits for the election result, the market will have broken out and these stocks missed their bottoms.
What is the pain trade? Certainly, a squeeze higher in Technology as most are flat in it after reducing their longs these past few weeks. Also from a technical point of view, the S&P 500 tried to break below 3225, but as it recovers 3400, it seemed that is a failed break, and now as it moves above 3420, technically the charts look all clear to go back to even 3500+.
Unwinds can be painful, but use that opportunity to pick your favorite stocks, and not be too fixated on macro. No matter who wins, Trump or Biden, they both want the same thing, a higher stock market and U.S. economic recovery. We are probably debating between $1 trillion and $2 trillion, but a fiscal deal will happen at some point. It just depends which stocks you play it through. Rather than play through Banks that are hoping for yield curve bull steepening, it is best played via quality names like large cap Technology and some consumer discretionary stocks that will benefit in the post Covid world seeing earnings rapidly growing. Oil does not care about macro, it is seeing genuine demand picking up, which is why the price is rallying. It is a seasonal game!
We could still get some volatility over the next few days, regardless, a fiscal bill is coming to help the U.S. economy. But for now, rather than waiting for that big Dollar move, or trying to call the sector rotation trade, focus on a genuine company earnings catalyst and valuation triggers!
