As the world continues to wait for the official election results, the market sends a clear message that it is comfortable with the apparent outcome. The S&P 500 picked up over 7.25% this week despite the sluggish vote count. Nothing is official, but the market is sniffing out a continuation of divided government. Going into the election, the betting odds and polls indicated a strong probability of a Democratic sweep. At the moment, this looks unlikely, and the market has spent much of the week recalibrating. In general, this takes the possibility of tax increases off the table and moderates some of the more extreme agenda items that have been thrown out. With the worst-case scenario likely falling off the table, the focus is free to return to earnings and the potential for further stimulus.
As of Friday close, Joe Biden needs only 17 more electoral votes to claim the Whitehouse. 5 states remain uncalled, and Biden leads the vote count in 4 of them. Betting odds have moved strongly in favor of a Biden presidency at this point. Republicans managed to pick up a few seats in the House, but the Chamber is expected to stay firmly in Democratic hands. The Senate is tighter, but the road looks tough for Democrats to retake the Chamber. Five races have yet to be called. Democrats will need at least two seats if Biden goes on to be President to take the Chamber. Republicans are leading in all of the remaining races. However, Georgia presents a wrinkle. Both of its Senate seats were up for election, and Georgia rules require a candidate to earn 50% or more of the vote. In the two races, neither leader has more than 50%, and so a run-off election is likely to be scheduled for January. Though Republicans would still be favored, the extra attention over the next few months could be a potential source of anxiety for markets. So far, the participants do not seem to be concerned.
With the state of the count so far, we’ve seen a few notable developments in the markets. The most notable is a strong divide between stocks with regulatory risk vs. those with legislative risk. The Health Care sector is a prime example of this. Going into the election, the threat of a sweep kept alive the potential for more extreme legislative policies aimed at drug pricing. With a split government, these proposals would moderate or disappear. Health Care stocks exploded immediately following election night.
On the other hand, the President has a lot of power to set a regulatory agenda. For example, pipeline stocks remain particularly weak. We’ll continue to have a close eye on convergences and divergences over the coming days and weeks. Often we see that trends in the early days following an election persist for some time. It is certainly not too late to take advantage of the changing dynamics we see in the market. It is also interesting to note that the market, in general, has historically continued to trend as it did leading into an election. Our friends at Strategas Research Partners have done work to show that the market has gained 5.6% on average in the six months following an election when the trend was positive going in. We continue to be optimistic.
Earnings have gotten little attention, but they can only be described as fantastic relative to expectations. With nearly all of the S&P 500 reporting, Q3 earnings have surprised to the upside by over 17%. Though they are still down 7% YoY, it is clear that analysts have been overly bearish on how companies have handled COVID-19. We continue to reiterate that great companies find a way to adapt.
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.