A week ago, market participants knew we were going to have a very volatile and dramatic week. It was certainly volatile and dramatic but no one predicted exactly how things would unfold.
The thinking a week ago was that the biggest danger the market faced was an unclear election result. There was fear that the uncertainty of a battle over the legitimacy of voting would cause a major market selloff.
We did see what many had feared but rather than sell off we had a huge rally. The rally had more to do with the Senate than the Presidency, though. Republicans made a surprisingly strong showing outside of the Trump vs. Biden race. The pollsters did not expect that and neither did the market.
It has always been the conventional wisdom that the market favors a split government because it makes it more difficult for either party to institute extreme policies. The potential for legislative gridlock was cause for market celebration as it would likely be favorable for business as far as tax, trade and other issues. There is still a slight chance the Democrats could gain a tie in the Senate that would be broken by the Vice President but it is remote.
The election developments caught many market players by surprise and triggered a mad rush for repositioning. It was one of the strongest upside moves since June and it ended with just a brief pause on Friday. Many stocks are now extended but quite a few small-caps will be reporting in the next two weeks and then we head into the positive seasonality of November and December.
While there is still some hope that a fiscal stimulus bill may be agreed upon in the lame-duck session, there will also be the issue of the debt ceiling again. With the election mostly over at this point, the focus is going to return to Covid and the pace of the economic recovery. Still, the big positive is that this continues to be a market with a "risk-on" mindset and it doesn't' seem to be slowing.
We will start hearing quite a bit about potential Biden policies that will come into play but with gridlock potentially in place, nothing very ambitious is likely to occur. That is probably a positive longer-term, although it will impact various sectors.
Next week we will see if the bulls can keep the momentum going but we won't have the same major catalyst to drive things again.
Have a great weekend. I'll see you Monday.