November 6, 2020
Stocks jumped, and government bond yields dropped after the apparent narrow victory of Joe Biden in the US presidential race was paired with the probability of the Senate remaining in Republican control. With the Democrats unable to sweep both houses of Congress as well as the presidency, as some had expected, there is less likelihood of enacting many of the major policy changes discussed during the campaign. Investors are no longer expecting major tax hikes, a rollback of the 2017 corporate tax cuts, or additional significant regulation. There will likely be no “green new deal”, no public health care option, no senate rule changes (no filibuster repeal), or changes to the structure of the Supreme Court. However, all that can still change, as control of the Senate looks like it will be determined in two runoff elections in Georgia on January 5, 2021. Technology and Internet stocks surged as concerns about big changes to US anti-trust laws eased. Taking the public option off the table provided a significant boost to health care stocks.
Although some additional fiscal stimulus is expected to help offset economic damage from COVID-19, divided government points to a smaller package, which means less debt-funded spending and a lower risk of future inflation. As a result, government bond yields tumbled, and with them, the US dollar. However, yields reversed part of their move Friday after a surprisingly strong improvement in US labour markets. Lower yields added further support to stock valuations, especially in growth stocks. Less stimulus also means there may be an increased burden on the Federal Reserve to offset any slowdown resulting from rising COVID-19 infections and restrictions. This strengthens the expectation of interest rates staying lower, for longer. In total, it appeared that the tight outcome of the election ensured that the key elements of the equity bull market would remain in place for the foreseeable future.
Every sector of Canada’s S&P/TSX Composite Index, except energy, gained ground as the benchmark posted its biggest weekly gain in over six months. Health care was the strongest sector as cannabis stocks soared — Democrats indicated during the campaign that they would decriminalize marijuana at the federal level. The information technology sector was also especially strong as e-commerce heavyweight Shopify Inc. once again rode on the coattails of US Internet giants. The interest rate-sensitive communication services and utilities sectors underperformed as bond yields fell. Oil and gas stocks were initially lifted by the International Energy Agency’s report of large drawdowns in crude oil inventories. However, the group fell due to global demand concerns as European countries toughened travel restrictions because of increasing COVID-19 cases. Canadian employment was reported higher for October. However, gains are coming at a slowing pace.
The technology and health care sectors led the gains in the S&P 500. The consumer discretionary and communications services sectors were also especially strong, as Amazon.com Inc., Facebook Inc. and Alphabet Inc. (Google) were seen to be beneficiaries of a lower risk of antitrust action. While election uncertainty faded, economic data continued to show gradual improvement. Purchasing managers’ indices for both the manufacturing and services areas of the economy improved, and unemployment claims continued to decline. At its policy meeting, the Federal Reserve kept interest rates steady near zero and made no change to asset purchase programs. However, Fed Chair Jerome Powell said they were looking at ways to boost stimulus by adjusting quantitative easing.
All major equity markets in Europe and Asia moved higher, with the positive reaction to the US election outweighing concerns about new lockdowns in Europe and the risk of a double-dip recession. UK stocks underperformed as talks with the European Union about post-Brexit trade once again seemed to make little progress, despite indications early in the week that a compromise over the controversial issue of fishing rights might emerge soon.
What’s ahead next weeks:
- No significant economic releases.
- Consumer and Producer Price Indices (October)
- Univ. of Michigan Consumer Sentiment Index (November)