Despite election uncertainty, S&P 500 Index surges over 7%

Investing isn’t about beating others at their game. It’s about controlling yourself at your own game. – Benjamin Graham

Following the worst week for the major stock market averages since the onset of the coronavirus pandemic in March, conventional wisdom believed that with the presidential election last week, volatility would return with a vengeance. Although the outcome of the election was still undecided on Friday as votes were still being counted in several battleground states, investors ignored the uncertainty and piled into stocks, sending the S&P 500 Index to its best election week performance since 1932 with a gain of over 7%. The technology-heavy Nasdaq Composite Index performed even better as it rallied 9% at the same time that the Cboe Volatility Index (VIX) or fear index plunged, indicating absolutely no fear on the part of investors.  While it became increasingly clear that former Vice President Joseph Biden would eventually prevail, investors also priced in a divided government with Republicans ultimately controlling the Senate, though that was still in doubt as Georgia’s two Senate races were headed for a runoff in January. The stock market has always favored divided government with the potential for gridlock as the president would be less likely to implement his own policies. In Biden’s case, that means there would likely not be any corporate or individual tax increases, no further antitrust scrutiny and regulation of big technology companies and no worsening of the China trade war. In addition to the uncertainly over the election results last week, investors also had to cope with surging Covid-19 cases in many states as well as third quarter corporate earnings reports, which continue to be a bright spot as most companies have beaten analysts’ estimates. The other significant event last week was the Federal Open Market Committee (FOMC) meeting and, as expected, the Fed decided to leave interest rates unchanged near zero. In its statement, the Fed said that economic activity remains “well below” levels prior to the pandemic but issued no new monetary policies. It emphasized that it is not out of ammunition that could help bolster the economy, but did reiterate that more needs to be done on the fiscal side. Fed Chairman Jerome Powell also stressed that economic growth is largely dependent on the path of the coronavirus, which unfortunately does not bode well for the future as cases and hospitalizations are both rising.

Last Week

Economic data continued to be favorable as the employment report for October showed that 638,000 new jobs were added, which was higher than expected, and that the unemployment rate fell to 6.9% from 7.9%. Weekly jobless claims also improved as they fell by 7,000 to 751,000. The ISM manufacturing index in October jumped to its highest level since November 2018 and new orders surged to their highest level in nearly 17 years. The ISM non-manufacturing or services sector index was slightly less than expected but grew for the fifth straight month and was still solidly in expansion territory.

For the week, the Dow Jones Industrial Average rose 6.9% to 28,323 while the S&P 500 Index gained 7.3% to close at 3,509. The Nasdaq Composite Index surged 9% to close at 11,895.

This Week

Both the producer price index (PPI) and the consumer price index (CPI) for October are expected to increase slightly with the CPI showing a year-over-year increase of only 1.3%. The University of Michigan consumer sentiment index in November is forecast to approximate the reading in October, which was about 82.

The bond markets in the U.S. will be closed on Wednesday November 11^th in observance of Veteran’s Day.

The most prominent companies scheduled to report third quarter earnings this week are McDonald’s, Walt Disney, Adidas, Applied Materials, Cisco, Rockwell Automation, Advance Auto Parts, D.R. Horton, Occidental Petroleum and Simon Property Group.

Portfolio Strategy

After last week’s strong rally that saw the stock market erase all of the losses from the previous week and then some, investors could take profits this week with the market trending lower. There is no potential market-moving economic data in the coming week and earnings season is winding down as most of the corporate heavyweights have already reported. Uncertainty will not be going away, either, with new daily Covid-19 cases topping 100,000 and election results that are being contested, which involve vote recounts and multiple lawsuits. The rise in coronavirus cases could undermine the economic recovery as states impose new restrictions on businesses and consumers tighten their purse strings. Heading into the election, it was thought that there would be a so-called “blue wave” where Biden would be elected president and the Democrats would control both the House and Senate. While Biden is likely to be declared the winner, the stock market surged last week on the belief that the Senate would remain in Republican hands, although even that is now in doubt with a runoff for two Senate seats in Georgia scheduled in early January. Markets generally hate uncertainty, but the positives of better than expected third quarter corporate earnings and favorable economic data that includes strong third quarter gross domestic product (GDP) and a drop in the unemployment rate to under 7% could provide optimism for investors. This may lead to a tug of war between the bulls and the bears and produce volatility with the stock market trading sideways over the near-term until these issues are resolved.