Written by Jim Welsh
Weekly Technical Review Special Update 04 November 2020
All the votes have yet to be counted but it appears that Joe Biden will be the 46th president. The Blue Wave that was expected by the pollsters failed to materialize and it looks like the Republicans will hold the Senate. The Democrats thought they would pick up 15 seats in the House of Representatives but instead may have lost 5 seats. If the final tallies hold up President Biden will have to negotiate with a Republican Senate and a smaller Democrat plurality in the House.
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The Dream of Democrats running the table in the 2020 election and using their newly acquired power to give statehood to the District of Columbia and Puerto Rico, end the filibuster, pack the Supreme Court, pass an aggressive Green New Deal agenda, provide free college to all, health care for all, and potentially start a Universal Basic Income program will have to wait for another time and another election. As noted in the November 2 WTR:
“My guess is that Joe Biden will win, but the Republicans will hold onto the Senate.”
In the 1960’s the notion that a black man would become President of the United States would have been considered preposterous at a time when every black person in America didn’t have the right to even vote, until the Voters Rights Act was passed in 1965. I was proud of our country when Barack Obama was elected president in 2008 even though I did not support him. I am proud that the voters in our country were able to split their vote to reject the potential of a lurch to the left had a Blue Wave swept the country by voting for Republicans in the Senate, even as they voted for Joe Biden for president.
For the country to truly benefit from the election two things need to happen:
1. Democrats should wake up
It would be good if the Democrats could look in the mirror and accept that what they were selling in 2016 and 2020 is not what this country wants. I doubt many Democrats possess the humility that true reflection would require, since their reaction to the 2016 election was to double down and pursue impeachment and develop an even more progressive agenda. There are real economic and social problems that need to be addressed, but tearing down the existing framework of our economy and defunding the police is not a good starting point.
2. Trump should recognize he defeated himself
It would be good if President Trump could accept defeat gracefully since he is responsible for his failing to be reelected. (Although it is still possible that President Trump could win, it is likely a long shot.) His treatment of John McCain, who is admired and revered in Arizona by people in both parties contributed to President Trump losing that state. There is a chance that a good number of people waited to mail in their vote until after the first debate. After President Trump did poorly in the first debate, it’s certainly possible that enough voters decided not to vote for President Trump, and that may have changed the outcome in a few key states. For many of these voters, they weren’t voting for Joe Biden, but against President Trump.
As states were reopening their economies after the lock downs ended, President Trump would have won the election easily had he recommended wearing masks to facilitate getting the economy back on track. The spike in cases and hospitalizations in August would have been less and made President less vulnerable to the accusation that his behavior cost lives. It is interesting that he resisted and ridiculed those advocating masks, even though he knew the spread of COVID-19 was primarily airborne as far back as January.
It has been reported that President Trump’s team and Joe Biden’s team employed more than 1500 lawyers prior to the election, so they could to go to the mattresses if their side lost the election by a small margin in any state. After losing the election in 2000 the Democrats aren’t going to give an inch, and President Trump will go to the Supreme Court if necessary. If he does, his appointment of Amy Barrett will inflame Democrats.
Stocks
The FAMANG stocks had a monster rally in response to the election for a number of reasons. The political risk from Congress of potentially breaking up Facebook or Google, which caused those stocks to decline recently, will be less. Hedging in these stocks likely increased prior to the election and contributed to their strength today as those hedges were removed. Call buyers in the FAMANG stocks were likely active today. The huge call buying has driven these stocks higher since June, as dealer’s have been forced to hedge their risk by buying these stocks.
In the last two weeks cyclical stocks have caught a bid as investors, expecting a Blue Wave and a possible $3 trillion stimulus program, bought them. The relative performance of the Russell 2000, bank stocks, industrial and basic material stocks has improved. All of these sectors were quite weak today as the prospect of a big stimulus plan faded. The Russell 2000 was up 0.5%, but the Industrials (XLI) was down -1.0%, Financials (XLF) -1.2%, Materials (XME) -5.1%, and Regional banks off by -7.1%. In contrast the Nasdaq 100 (QQQ) soared +4.4% which lifted the S&P 500 to a gain of 2.2%.
Investors were heartened that a Republican Senate would make it impossible for Joe Biden to increase the corporate tax rate from 21% to 28% and taxes on the top 1% that would bring in more than $4 trillion in the next decade. While this is good longer term, the lack of a big stimulus plan will hurt the economy in the next six months.
There is a chance that Treasury Secretary Mnuchin and Speaker Pelosi will resume talks, but the Republican Senate is unlikely pass the $1.8 trillion deal that was on the table but rejected by Speaker Pelosi. Even if Speaker Pelosi had agreed there is no guarantee that Senate Majority leader McConnell would have been able to muster enough Republican votes to pass it. If a deal is reached it is likely to closer to $1.0 trillion, which may disappoint investors.
In the afterglow of the election and fixation on no new taxes, the prospect of a smaller deal or no deal until the first quarter was overlooked. The Federal Reserve will release the FOMC statement tomorrow and Chair Powell will hold his press conference. Powell will emphasize that the Fed will keep monetary accommodation on full, but he will also reiterate the need for additional fiscal stimulus if the economy is to avoid a weaker recovery. This reminder may get investors attention. The October employment report on Friday will also remind investors that the labor market’s recovery has stalled, since job growth is not likely to be strong.
The strong momentum concentrated in the FAMANG stocks today will not be enough to keep the S&P 500 moving higher, if the prospect of additional stimulus dims and the economy reminds investors that it truly needs more fiscal support sooner rather than later. If, as expected, the election degrades into a court battle, the stock market may not be too happy about the indecision and rancor that ensues.
While the spread of COVID-19 was off the radar today, and may remain a back ground issue in the next few days, the risk that infections and hospitalizations could continue to swell, especially in the 2-3 weeks after Thanksgiving, is another risk that will weigh on the economy.
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