The trend decisively remains up for this Market. It’s been remarkable and quite surprising. Friday’s price action reflects what’s been going on for months. It opened lower, but quickly reversed higher to close out yet another eventful week. They’re all eventful these days. The S&P 500 reached all-time highs this week. But more broadly, equities had a mixed performance with Growth and Momentum the standouts while Value and Cyclicals have been held back. Apple alone accounted for almost all of the gains on the Dow on Friday.
Despite closing at an all-time high, half the S&P stocks are still down on the year. Taking it further, 35% of the S&P components are still down 25% or more. That is really telling. The Tech rally continues to show legs and there are renewed hopes for a coronavirus vaccine.
It’s difficult to gauge what exactly is being priced in right now. But it’s pricing in a lot. Under normal conditions, this time of year tends to bring volatility with healthy declines. Summer sell-offs through September are common for the Stock Market with bottoms in October, which lead to year-end rallies. It’s even more pronounced in election years. That would be normal. But 2020 is proving to be the furthest thing from normal.
The first-ever virtual Democratic National Convention concluded last night with Joe Biden accepting his party’s Presidential nomination. Key for him is to convert anti-Trump voters into pro-Biden voters. The early reviews have been quite positive for the Vice President’s speech. I was on another strategy call this morning. Our sources stated Biden’s performance was an effective response to Republican characterizations of Biden as mentally declining and unfit for office. However, it is unclear whether Biden will benefit from a “convention bounce” in the polls, as the effect has been minimized in recent years due to the polarization of the electorate and a smaller number of swing voters. Since social media and cable news covers all things politics all the time, the needle already moves.
Policy-wise, the Biden speech was short on specifics. That’s to be expected. There was nothing new to report about his agenda. The former Vice President did take a rhetorical shot at Wall Street in a segment prior to the speech. He was speaking to union members and said: “You guys built America, not Wall Street.” Our Washington sources considered that shot mild in comparison to past attacks on Wall Street by Democrats. It is still believed that a Biden election is a slight negative for Financials and perhaps Health Care companies. But the role the Banks and Pharmaceutical and Biotech companies have played in combating this pandemic might ease their traditional targets.
Next up, the Republican National Convention. It will be held next week. You can expect a great deal of talk and effort to deflate the Democrats’ new optimism. President Trump said on Thursday that if he is elected to another term, he will slap tariffs on American companies that won’t move jobs back to the US from overseas. He added he would give tax credits to companies that do repatriate jobs. The statement was short on details.
Trump has widely been viewed as the Market’s preferred candidate in the November election. That theory is based on his emphasis on lower taxes and looser regulation. Those are things the Market really likes. That said, the Market seems to be showing some comfort with the prospects of a Joe Biden Presidency. Biden has had a lead in most of the polls for a while now. Surveys still suggest people believe Trump would be better for the Economy, but the divide there is not that wide. Who knows what to think about polls anymore. Everyone learned that lesson in 2016. What happens in November is what matters.
Our sources believe that the perceived comfort with the idea of a Biden administration fits with widespread expectations that he would spend most of his time in the center-left. If elected, Joe Biden is expected to embrace global alliances and would not use tariffs as a driving force in his trade policy. Biden has already said he would not keep tariffs on China. There is clearly rhetoric about the left-wing of the Democratic Party dictating the White House. Campaign platform talking points usually don’t become policy. It’s often said, Democrats need to run to the left to get nominated and run back to the center to get elected. The bigger issue perhaps is the outcome in the Senate. The Market knows this.
Something else happened this week which didn’t get much attention, but could have a profound impact on the Market going forward. The Department of Justice announced a restructuring within the Antitrust Division. The new structure is intended to make the DOJ more effective and that could mean that future administrations that want to use antitrust laws aggressively could find the DOJ more efficient than it has been in the past.
Our Washington sources believe a Biden administration could use antitrust laws to either block mergers or force changes in deals. They might even use antitrust laws to break up some firms. Remember the testimony of the Tech Titans on Capitol Hill a couple weeks ago? Yesterday’s announcement could clear the way for an administration to use the DOJ more effectively and efficiently. It’s probably a remote chance. But it’s definitely out there.
These are such emotional times. Our nation is very divided. Everything seems political. And politics are emotional. It’s a vicious cycle that will continue to generate speed and momentum heading to November. Realistically, whatever voters thought about the candidates going into this week, they probably enter the weekend with opinions feeling even stronger. The divide widens. Ultimately, the big movement in the polls probably comes down to the debates, which begin next month.
The Stock Market at record highs in the Covid world is quite a statement. The problem is, it’s not exactly clear what it means. Politics don’t drive Markets. But they certainly influence. Election years are generally bumpy, but tend to end in the green. 2020 is a year like no other. We expect the same for this election. We continue to navigate these uncharted waters. We don’t expect it to be smooth sailing ahead.
Stay safe this weekend. We are especially thinking of those in the fire zones given current conditions and forecasts for more lightning to come. We’ll be back, dark and early on Monday.