I have to explain to you how this market, in light of what happened in Washington, D.C. on Wednesday, can hit record highs. "What kind of cockamamie nonsense is that?" you have to be asking.
I am going to tell you. I am going to make sense of something that seems so irrational as to be heartless and unpatriotic.
You might be asking yourselves a completely logical question: Does the market like violent confrontation? Does it agree with the rioters, somehow? After all, there was plenty of time for it to get hammered Wednesday, and it didn't. Now, with a night's reflection, there was even more madness?
Or, is it more rational than it seems?
Let me tell you a story.
Thirty-eight years ago I first sat down on a professional trading desk at Goldman Sachs (GS) . The market was roaring, just smoking higher. I was green as green could be. A real rookie. I turned around to a much senior trader, and I asked him, why the market was exploding to the upside.
He looked at me up in down in my Moe Ginsburg suit with my pathetic buttoned down collar -- you could only wear straight collars with French cuffs -- and he turned away as if I were some vagabond, and said, "more buyers than sellers."
I wanted to say, "are you kidding me?"
But he had moved on to a six-figure-sized trade and left me stewing in my own confusion.
Well, guess what? The market is going higher because there are more buyers than sellers. My brusque tutor was right. The question to ask right now, after the horror of yesterday, is, "Why aren't there more sellers?"
Why aren't there more?
First, the buyers have no other place to go. They are in stocks, because they want to get a return that is greater than bonds. They need them, because they need to save money. They tend to use index funds. Those who have already invested with index funds do so for future returns. They are not going to sell good -- stocks -- for bad -- bonds. So they just don't offer the supply to meet the index fund demand. Automatic buying, not automatic selling.
Second, you may be watching the tragic scenes of a mob running amok on the sacred ground of the republic, but the machines aren't. Much of the money that is invested in the stocks is mentioned by algorithms that tell money managers what to do. They are on autopilot. The machines tend to be given the same instructions, because there is a lot of group think. When rates are low and the economy is about to get stronger, the algorithmic playbook says we are going to reflate, so buy the stocks of industrials, even if you sell techs to do so. These machines can't see the disgraceful mayhem in the Capitol, because, alas, they are machines. No heart there. No conscience. Given the similar programming, there was no machine spitting giant sell orders, so you had stocks like Caterpillar (CAT) or Norfolk Southern (NSC) or Honeywell (HON) , classic industrials soaring. A lot more machine buyers than machine sellers.
Third, we seem to forget that it's not a stock market, but a market of stocks. Of the stocks in the S&P 500, many have big buybacks that buy stocks literally by rote. They are in there every day, taking stock off the table. The treasurers, are, again, on autopilot. They don't stop, because there is turmoil in Washington. These buybacks happen every day. They are a great prop to many stocks. There are no automatic sell programs to speak of, except for that of Tesla (TSLA) and the market loves Tesla so much, well, it doesn't matter. The relentless retirement of stock has created a genuine stock shortage among the remaining and dwindling number of industrials.
Fourth, and speaking of Tesla, the amazing run in the stock that is run by the richest man in the world, keeps propelling higher. You could argue that it went up Thursday because still one more negative analyst capitulated. I would say, though, that because this stock has been added to the S&P 500 Index, there are plenty of funds that have to continue to buy it. Again, though, think more buyers than sellers. As the stock goes higher, these index funds do not sell it. They let it ride -- so do individuals whom I think are greedy at this point. But Tesla's stock has embraced the Gordon Gecko-greed-is-good philosophy, and it's been right. Many people are buying other stocks that they think could be the next Tesla. They are not going to be shaken out of their positions, even by the bloodshed we saw on our screens where legislators are supposed to be at work.
Fifth, you have to wonder, if there is so much stimulus coming from the government, and if you have excess cash, you might want to put it in the stock market to invest in. But at the same time, who would sell into the face of that wall of money coming your way. Remember, no one is taking money from you, they are giving it to you. No reason to be a seller, good reason to be a buyer.
Many believe that the storming of the Capitol may be the high water mark of discord. The election is over. The endless challenges are finished.
Sixth, we see the chaos in Washington, but many believe that the storming of the Capitol may be the high water mark of discord. The election is over. The endless challenges are finished. The possibility of unity after years and years of hatred may finally be upon us. This love of gridlock is being replaced by the possibility that government can play a positive role in our lives, if it can actually do something. Why sell if you think that we are at last at the end of a brutal, divisive period? You have to accept the fact that the president -- hate or like him -- is divisive.
Seventh, managements have become schooled in working with emerging market governments and destabilized situations a long time ago. They are seasoned and know how to handle chaos, even if it is Washington. A siege that they know will have to end with a new president doesn't bother them and, because you have seen this happen time and again overseas, why would you be rocked out of your position now?
Eighth, Democrats love infrastructure spending much more than Republicans do. So, if you own the stock of a Caterpillar or a United Rentals (URI) or a Vulcan Materials (VMC) or Martin Marietta Materials (MLM) and you stuck with these through the possibility of the Republicans keeping the Senate why bother to sell them now? The prospects have changed for the better.
Ninth, so many of the new companies that have come public need a government for subsidies. Almost all of the electric- and hydrogen-powered vehicle companies, including Plug Power (PLUG) -- whom we will speak with tonight on "Mad Money" -- need the government to get behind them with credits for customers who buy. Would you really want to sell these now that both houses of Congress and the president favor subsidies?
Finally, remember I told you that when the market is down, you have to use it to purchase stocks that are part of my 10 long-term themes. Well, it worked again as many of the stocks of these themes got hit Wednesday: e-commerce, travel and leisure, digitization, cybersecurity, 5G and individual wealth and management. They all bounced back Thursday.
So, yes, the insight I got from that Goldman trader -- more buyers than sellers -- seems soporific and circular, but, always remember, if the sellers overwhelm the buyers, the market does go down, but the sellers saw no real reason to sell. The buyers? They wanted in, regardless of the sad spectacle.