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Election Waiting Game Still Being Played



Chief Market Analyst

First things first: the winner of the presidential election is still unknown. Secondly, the futures market is displaying large gains this morning, particularly the Nasdaq 100 futures, and the Treasury market is displaying large gains as well, particularly longer-dated securities.

Currently, the S&P 500 futures are up 54 points and are trading 1.6% above fair value, the Nasdaq 100 futures are up 408 points and are trading 3.6% above fair value, and the Dow Jones Industrial Average futures are up 161 points and are trading 0.6% above fair value.

These indications are linked almost exclusively to expected outcomes for the election, one of which includes the specter of a contested election.

In brief, the narrative this morning falls along these lines:

  • Both President Trump and former Vice President Biden have multiple paths for winning the remaining electoral votes to get to the needed 270 electoral votes.
  • It could take at least another day, or several days, to count the remaining votes in key battleground states — PA, MI, WI, AZ, NV, NC, and GA — that will ultimately decide the winner of the presidential election.
  • It is thought that Republicans will likely maintain control of the Senate. Democrats will maintain control of the House.
  • The uncertain outcome and the specter of a challenge to the presidential election outcome are pointing to the prospect of a stimulus package being further delayed.
  • Given the thought that Republicans will likely maintain control of the Senate, it is thought that the size of any additional stimulus package will be much less than the near $2 trillion stimulus plan being discussed before the election. It is also thought that there is less risk of a change to current tax policy, which includes lower corporate and individual tax rates and lower capital gains tax rates.
  • If a fiscal stimulus package is delayed, and is eventually smaller than had been hoped, the Fed may find itself in a position of needing to do more to support the economic recovery.

Against this backdrop, which features a challenge to growth prospects (delayed fiscal stimulus) and possibly no change to existing tax policy, the connection is being made that it favors growth stocks. Hence, there is a disproportional indication in the futures market in favor of the Nasdaq 100 futures.

The anticipated strength in mega-cap stocks, and other growth stocks, though, is pushing up the futures for the S&P 500 and Dow Jones Industrial Average, as it is overshadowing what is expected to be a relatively weak showing by the cyclical/value sectors and stocks.

To wit, Apple (AAPL) is indicated 2.0% higher while the likes of Caterpillar (CAT) and Bank of America (BAC) are both indicated 1.7% lower.

A weaker than expected ADP Employment Change Report for October isn’t helping the cyclical/value trade either. According to ADP, an estimated 365,000 positions were added to private-sector payrolls in October ( consensus 600,000), versus 753,000 in September, reflecting a clear loss of growth momentum in the labor market.

Separately, the trade deficit for September narrowed to $63.9 billion ( consensus -$64.4 billion) from $67.0 billion in August, as export growth ($4.4 billion) outpaced import growth ($1.2 billion).

With nearly every ounce of attention focused on the election, and the potential implications of the election outcome, these economic reports haven’t had much influence in the headline mix.

The behavior of longer-dated Treasuries is catching some added attention, however, as another beacon of the market’s spin on stimulus prospects and growth prospects, as well as the component of heightened uncertainty.

The 10-yr note yield, which rose as high as 0.94% following yesterday’s settlement, is down nine basis points to 0.79% and is feeding into a curve-flattening trade that is an added weight on the financial stocks.

The real weight on the capital markets, though, is the waiting that still needs to happen before the presidential election result is known and how that might influence a potential legal challenge that adds to the waiting time.

In the meantime, market participants are back to favoring what they know does well in the stock market when growth prospects are in question. They are going back to the growth stocks, which is making all the difference in this morning’s futures trade.

Originally Posted on November 4, 2020 – Election Waiting Game Still Being Played

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