Weekly Update

Stocks are Looking Forward

Tagged: , , , , , ,

Published October 16, 2020

The stock market has a pretty good track record for determining who will win a presidential election.  The indicator looks at the market return over the three months leading up to the election.  A positive return suggests a win for the incumbent.  The data below, going back to 1928, shows an 87% success rate for the stock market in picking the ultimate election victor.
As we go to press this week, this stock market indicator suggests a win for the incumbent.

Stocks Can Predict Who Will Win in November

Of course, it really makes no difference to the stock market who is in the Presidential chair.  Historical stock returns show almost no correlation between returns and the party in power.  What does show a marked correlation is seasonality.  We have spoken many times of the post-election bounce in stocks, historically.  The chart below shows the usual “sell in May” seasonality of the stock market – that almost the entirety of the stock market’s returns occur from November to May.  We are on the cusp of this positive seasonality.


Shifting gears substantially, we take an amazing chart from Blaine Rollins’ blog showing the surging fortunes of renewable energy companies.  The largest of the renewable energy companies, NextEra Energy, now boasts a stock market value greater than “traditional” energy behemoth Exxon.  Exxon is well more than 10 times the size of NextEra (in revenues).  This is one area where election-driven investment has held sway.  Investors believe a Democrat-led government will push for more favorable renewable energy policy.  However, the trend toward these stocks, and away from more traditional energy plays, has been underway all year, if not longer.

NextEra Energy is bigger than Exxon

The stock market looks forward and, most of the time, rewards growth.  That has been especially true over the past decade as Amazon stared down Wall Street with year after year of losses in pursuit of non-stop revenue and market share growth.  Now dominant, Amazon prints money to the tune of over $10B in profits each year, and its stock price has proven the value of betting on growth. So it is with the renewable energy companies, the electronic payment companies like Square and PayPal, Tesla versus Ford and GM, and on and on.  The stock market usually says: embrace the possibility of the future, and the innovation that will deliver that future.  Failure and an unwillingness to embrace that future lead to the sort of stock price lethargy facing the lagging, old-line companies.

Look forward. That’s the stock market motto.  When the economy shutdown, stocks plunged.  But they quickly recovered despite the ongoing dismal economic data as the future looked brighter than the empty parking lots of the shutdown.  Look forward.  Once the haze of the election clears, the stock market will be in a seasonally strong period, and ever closer to the end of the pandemic.  That has been the stock market’s message.

Market Update

Investors looked to build on recent market gains as the calendar turned to corporate earnings reports. Monday delivered strongly with the FANGMA stocks surging upward to give the S&P 500 a +1.6% advance, while the Nasdaq 100 (QQQ) leapt +2.6% (FANGMA = Facebook, Amazon, Netflix, Google, Microsoft, Apple). Stocks gave back -0.6% Tuesday as bank earnings failed to inspire investors while Johnson & Johnson halted its coronavirus vaccine trials. Stocks slipped another -0.6% Wednesday with Congressional stimulus talks looking very unlikely to produce a positive resolution before the election. Stocks fell for a third straight day Thursday as unemployment claims ticked higher. Also, European countries looked set to respond to rising virus case numbers with a new round of population movement restrictions. The -0.2% loss on the day was, however, a positive reversal as stocks opened the day down more than -1%. Stocks closed the week trading in a tight range before closing on a slightly weak note, despite a strong retail sales report.

For the week, the S&P 500 held the prior week’s large gains with a +0.13% adder. The Nasdaq 100 (QQQ) rose +0.98%. Small-cap stocks (IWM), up substantially a week ago, held that move with a -0.22% weekly tally.

Warm wishes and until next week.