With treasuries, tech stocks and healthcare stocks all up sharply on Wednesday, it looks like markets are betting -- rightly or wrongly -- that there won't be major changes to the status quo in the coming months, even if the occupant of the Oval Office isn't the same.
In the weeks leading up to the election, treasuries sold off on expectations that we'd see not only a Joe Biden win on Election Day, but a broader "blue wave" that would also give the Democrats firm control of Congress. Such an outcome, it was assumed, would pave the way for massive amounts of stimulus spending, which in turn would lead to a lot of new debt being floated and perhaps also have an inflationary effect.
Meanwhile, many stocks saw choppy trading amid worries about the policy impacts of such a political landscape, whether in terms of taxes, regulations and/or interest rates. Tech and healthcare were two areas that particularly came under pressure, with concerns about high valuations and rising COVID-19 cases also clearly headwinds for some names.
Big Gains for Stocks and Bonds
Most U.S. equities are rallying, with the Nasdaq-100 posting a 5% gain as tech and healthcare names lead the way. And with less stimulus now expected, treasury yields are dropping like a stone, with the 10-year yield down 10 basis points to 0.78% and the 30-year yield down 9 points to 1.56%.
There's of course some direct correlation here between lower bond yields and higher stock prices. Lower yields spell a lower discount rate for calculating the present value of a company's future cash flows -- that's particularly important for richly-valued companies generating little of no free cash flow in the near-term -- and they also make investors more willing to chase higher returns on their cash by parking it in stocks rather than bonds.
At the same time, it's worth pointing out that not all sectors are taking part in today's rally. Infrastructure and construction plays such as Caterpillar (CAT) and Vulcan Materials (VMC) are selling off as stimulus expectations get lowered, and banks are slumping as markets bet that a low-rate, lower-stimulus environment will be less favorable for their bottom lines. Solar stocks are also giving back a lot of their recent gains.
Much of the Tech Sector Is Outperforming
Zeroing in on tech, it's notable that Facebook (FB) (up about 8%), Alphabet (GOOG) (up about 6%) and Amazon.com (AMZN) (up nearly 6%) are among the day's standouts, given the antitrust heat that the companies have been facing.
While the tech giants are now facing antitrust scrutiny from both sides of the aisle, Democrats have (as the House's recent antitrust report drives home) arguably taken a harder line on the whole -- particularly towards Facebook, which has been turned into a political whipping boy over the last few years.
The arrival of a Biden Administration -- and with it, new DOJ and FTC leadership -- could still lead to tougher antitrust scrutiny for the tech giants. But assuming a Biden Administration has to work with a Republican-controlled Senate, legislative action towards the tech giants could be more limited than might have been the case in a blue-wave scenario.
But the tech giants aren't the only tech firms posting outsized gains on Wednesday. Uber (UBER) and Lyft (LYFT) are soaring after Prop 22 was passed in California. And a host of other companies seen as winners in the current environment, such as cloud software and e-commerce firms, are also up strongly, as markets bet that such companies will remain safe havens and continue seeing strong growth even if additional stimulus is more restrained than what many expected a few days ago.
Chinese tech stocks are also outperforming, with the KraneShares China Internet ETF (KWEB) rising 6.5%. These are companies that might actually be seen as benefiting from a Biden victory, given expectations that it will spell lower U.S.-China trade tensions.
Reasons Not to Get Carried Away
Are all of the tech sector's big Wednesday gains justified? While lower rates are indeed good news for high-multiple tech stocks and it's understandable that shares of companies such as Uber, Lyft and Facebook (just to name a few) are catching a bid today, some of Wednesday's exuberance feels excessive.
First, while business trends still look positive for tech on the whole, valuations are still often steep. With or without a somewhat lower discount rate, a 100x forward P/E or a 30x forward EV/sales ratio can only be justified with quite a lot of future growth.
Second, as I discussed recently, the tech sector doesn't exist in a vacuum.
If large portions of the economy are struggling amid a fall/winter jump in COVID-19 cases, and if stimulus relief for those parts of the economy is smaller than previously expected (and perhaps at risk of taking a while longer to arrive as election results get fought over), there will be effects on consumer and business tech spending. Not necessarily catastrophic effects, but quite possibly ones large enough to make investors rethink some of the sky-high multiples being currently paid for many tech names.
Over the last several months, markets have often treated OK news for preferred tech companies as good news, and good news as great news. Wednesday's monster gains for tech might be the latest example of this phenomenon playing out.