The S&P 500 sprang back to life this week, advancing roughly 3.75%. Just like that, we are back within earshot of the all-time high with the market looking particularly broad. The ratio of S&P 500 advancers to decliners is at a new high. Unlike the summer, the mega-caps are not driving the market higher on their own. Industrials, materials, discretionary, and staples are all looking quite impressive in our eyes. This stands in contrast with the political and economic uncertainty we are fighting through. On the economic front, one could continue to make the case that bad news is good news. As the economic recovery disappoints, it increases the odds of another round of stimulus. Despite the current stalemate, the market remains relatively optimistic that a deal is coming. Stocks levered to fiscal stimulus are outperforming handily in recent weeks. Government just needs to get pen to paper.
The President went rounds with the Democrats this week, coming to the table and leaving it several times. At the moment, the Democrats are looking for a $2.2T package, and President Trump is proposing a $1.8T counter. With polls trending strongly against the President, it isn’t surprising that he is willing to compromise to get checks out within the next three weeks. Still, Republican leadership in Congress has been more reluctant to get behind a big package. The process is messy and may take time, but ultimately a deal is what the economy needs, and it will be delivered sooner or later. The market has come firmly around to this notion.
At the same time, the Fed continues to offer itself up as an incredibly good backstop. Comments from Fed officials this week have increased market confidence further. Essentially, they will buy bonds as necessary should the economic recovery slow. The promise of a fiscal deal and a generous fed have been enough to propel the market through a difficult stretch. The election is around the corner, but increasingly it looks as if participants have turned their attention to the other side and the prospect of higher levels of government spending and a long period of low-interest rates. The pushback to this is that there is a very non-zero probability that corporate and some individual tax rates are going higher in the coming year. Were that to be the case, it could crimp profits right at the projected moment of recovery for many companies. The question is whether there will be enough government spending and rate support to offset this impact.
It is also possible that the market could be seeing something in the election that polls are not. Historically, market rallies into the election have been favorable for the incumbent. Using S&P performance in the three months prior to the election, you would have been able to successfully predict the winner 87% of the time since 1984. However, we are still getting mixed signals when looking at baskets of stocks levered to one party or the other. Republican stocks are significantly underperforming their Democratic counterparts. It is tough to reconcile this with what we are seeing in the broader market. We don’t rule out the possibility that this race is a lot closer than the pundits believe or that it would be impossible for Trump to win.
All in all, the most we might be able to conclude is that the market is comfortable with either outcome. The potential implications for each candidate are well known. If the market was concerned, it would show it. The momentum surge has to be respected.
Preston May, CBE®
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.