What’s Next?

By November 6, 2020Weekly TGIF

The post-election rally sure has been something. The worst pre-election week has been followed by the best post-election week on record. The S&P 500 is up 7% so far in November. This was the best weekly gain since April. It is the best start to November ever.

A better than expected October Job Report kept stocks elevated into the weekend. 638K jobs were created last month. The unemployment rate fell to 6.9%. This is a very solid number, considering where the country and the Economy are. The problem is, Covid cases are spiking with over 120K new cases. This is a major jump from the previous record of 103K just the day before. Covid cases need to be controlled. It’s even worse in Europe. France had over 50K new cases yesterday. That’s the equivalent of 300K+ in the US.

The rally seems to be coming on the back of a divided government. It seems to be pricing in a Biden White House held in check with a Republican Senate and a narrower Democratic lead in the House. The Market likes the prospects for gridlock on Capitol Hill, which would be more favorable as it pertains to tax and regulation but might still agree on a smaller, but near-term stimulus package. It just won’t be the big package that a Blue Wave result would have brought. An infrastructure bill seems to have bipartisan support. The Senate won’t be settled until a January run-off in Georgia. And, the results for the Presidency are far from clear. The votes keep being counted. The election contestation has begun.

Here’s some insight and perspective on where things stand from our Washington sources this morning:

Voters appear to like Trumpism without Trump. They certainly do not like the message from the Left. Voters may not like Trump’s behavior, but the close presidential election outcome, the outcome of the Senate and GOP gains in the House signal a rejection of the progressives’ agenda and a preference for a right-of-center populist agenda. That suggests no tax hike and modest stimulus/relief packages that will be devoid of extraneous items that House Democrats included in their HEROES Act. We also believe that China tariffs remain in place for at least the short-term. We doubt Biden will want to pick fights with members of both parties over the tariffs.

Talk of a 4Q deal will likely increase since it could help the GA senators who will go to a run-off in January and might want to campaign on delivering COVID relief for GA. The politics of passing a bill are complicated – would House Speaker Nancy Pelosi agree to a bill that helps Republican candidates in critical elections? We are skeptical. What would President Trump do? Who knows? We expect Senate Majority Leader McConnell will at least bring a bill up so that the GA candidates have campaign talking points, but our base-case expectation remains a 1Q21 stimulus bill rather than a 4Q20 deal.

What’s next? Looking past the near-term noise around the election, things seem to be stacking up pretty well for investors. The building blocks are still in place for the Bull Market. A Biden Presidency with a divided Congress is a balance that could be beneficial. There will be no massive tax hikes. Any tax increase would be modest, if any. There would be less regulation. That would benefit Business, particularly the Tech Titans, which have been under fire for anti-trust issues. It’s not a coincidence that those stocks soared this week.

The next 4 years could see more favorable global trade. One could expect a re-engagement and stronger ties with our allies. Policy will likely still be tough on China, but multi-laterally. There might also be Tweet hibernation from the White House.

The Dollar has weakened with the likelihood of more monetary vs fiscal stimulus. A weak Dollar provides a boost to US exports, making them more competitively priced in the international marketplace. A Dollar decline also sends commodity prices higher. The weak Dollar has also given a lift to currency alternatives like Bitcoin and Gold, which have been racing higher. There’s been a lot of activity there.

Most important is a recovering Economy. Americans are learning to live with the virus. Progress for a vaccine is happening, and supplies are ahead. Exponential growth continues around innovation. The 5G rollout is connecting more devices and launching the next stage of the internet of things. America needs an upgrade in its infrastructure; Both physical and digital. The capital spend would be a job creator, which would stimulate so much more for Main Street’s recovery. Interest rates are low. Inflation is too. There is a very supportive Fed, who reiterated it again this week.

Liquidity. Liquidity. Liquidity. It’s been the fuel for stocks and there remains plenty of supply as well as intent. Once we finally get past the election trauma and drama, which will be bumpy, the setup is there for another multi-year rally.

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

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