Published November 6, 2020
We have noted multiple times recently that the post-election market is almost always a very good one; lots of December upside usually as investors breathe a collective sigh of relief that election uncertainty has passed and the country can get back to business. This time we have seen, perhaps, a bit of an early rush as stocks ripped higher on election day and kept on going from there. While that certainly seems mega-bullish given the seasonality of markets – e.g. November through April are the best months for stocks by far – we should put this week’s bounce in the context that we entered November having suffered through two consecutive losing months. As the chart below shows, our focus Nasdaq 100 (QQQ) index has merely recouped the losses of those two prior months and remains within a trading channel about 10% wide and going back to the August swoon.
The technical analysis rule would consider this sideways trading to be evidence of the market digesting the upward price move that preceded it (thus, the upward move from April through July). At some point, presumably soon, the QQQ would exit this sideways trading and resume its march upward. The other U.S. stock indexes look about the same.
But outside the U.S., and furthering the bullish case, is a breakout this week in emerging markets.
This is a continuation of the China-recovery theme, which includes a substantial uptrend going on in Taiwan. Also the break to new highs showing in Materials stocks (shown below) as expectations for inflation take hold, and perhaps some infrastructure projects being part of upcoming Congressional stimulus spending.
Emerging markets and materials stocks are driven in part by moves in the U.S. dollar. The drop this week in the dollar on expectations for continued zero interest rates runs a bit counter to the higher inflation idea. Nonetheless, these are bullish moves in cyclical markets.
While the U.S. indexes have yet to break to new highs, there are reasons to think that we are approaching that move after this week’s market action.
Market Update
Investors tried to rebound following the market’s worst week since March. The uncertainty of the election and rising coronavirus case numbers cast a shadow over the market last week. Monday brought a +1.2% effort with a solid ISM purchasing managers report offering support. Another +1.8% was added on Tuesday as election day came and went without any notable incidents, other than the tightness of the races. That tightness provided the largest post-election market boost in history Wednesday (+2.2%) with investors appearing to find a split Congress appealing. Though that split is taken to mean a smaller stimulus package, it was also read as a lower chance of a notable corporate tax hike, and a less aggressive regulatory stance toward big tech companies. Stocks continued their election rally Thursday with a +1.9% lift. The FANGMA stocks added to their post-election surge, with all of them retaking their 50-day trendline, breached only a week earlier. Healthcare stocks also rallied strongly as the split election results suggested a lesser chance of new regulation in that space. The Federal Reserve meeting concluded with the body maintaining their near-zero interest rate approach for the foreseeable future. With a larger stimulus package perhaps off the table, investors viewed the Fed as possibly being more aggressive in trying to stimulate the economic recovery. A better-than-expected monthly jobs report kept stocks elevated Friday. The flat result and lack of any real profit-taking was notable given the sharp rise throughout the week.
Stocks rebounded strongly this week with the S&P 500 (SPY) rising +7.24%. The Nasdaq 100 (QQQ) recouped three weeks of weak trading with a +9.37% rise. Smallcap stocks (IWM) did the same, adding +6.85% this week.
Warm wishes and until next week.