Is The Market Signalling The Election Winner?

What a nice rebound on Monday, as it was even more impressive because the Mega-cap weakness did not derail the entire market. And don’t look now, but the Russell 2000 is coming on like gangbusters, leaving the Dow as the worst big-equity index of 2020.

Message of the Market

Historically, when the stock market is higher in the three months before an election, the incumbent party wins.

To see the data, click here.

Sectors & Industries & Election Outcomes

I have to say the financial and mainstream media somehow tried to suggest yesterday’s rally was market excitement over a Biden presidency. I was like: “What you talkin’ bout, Willis?”  They refused to make any connections between Biden and the big-market selloff last week. I knew that would happen. 

Be that as it may, the message in the market with respect to the election was probably told in the action among individual sectors in the market. According to Refinitiv Financial, Energy (XLE) would be the hardest hit sector from a Biden presidency with earnings in 2021 potentially hammered more than 44%.

Yesterday, the best performing sector in the S&P was Energy.

Since Thursday, the S&P Energy sector is up more than 7%, while the S&P 500 is down more than 1%.

Other Market-Election Signals

Trump

• Agriculture

Agricultural names continue to act great. I think it’s a positive sign for President Trump as Phase One purchases from China pick u. There is no doubt his administration would pressure China to catch up with terms in the deal while Covid-19 worries subside. 

• Defense Contractors

L3Harris Technologies (LHX) soared yesterday, along with Textron (TXT), which posted solid earnings results. They were followed closely by General Dynamics (GD) and others. I cannot imagine a Biden administration maintaining the levels of military spending as they seek out funds to build the great, green utopia. 

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• Financials

The notion that big Wall Street banks will suffer from Trump’s policies seems far-fetched, but they would certainly fare better than under a Treasury Secretary Warren or Sanders. The former would crush big banks with an avalanche of penalties and new rules, while the latter would cut to the chase and gut them out of the gate.

Biden

• Weed

There was a pop in marijuana stocks, which are considered a Biden industry, although a part of the move is in anticipation of several states passing measures to allow legal use. These are small stocks, and it doesn’t take much to move them.  

• China Solar Panel Makers

These stocks shined yesterday (I can’t help it) and have been super-hot (there I go again), as investors spy all those billions of taxpayer dollars flowing into the coffers of China’s solar panel makers.

• Gunmakers

Gun stocks were higher after the FBI posted background checks for October. The 3.3 million checks pushed the full-year tally to 32.1 million, shattering the all-time high in the process. There are serious concerns about an attempt to repeal the Second Amendment – after packing the Supreme Court with five more associate justices.

To see the chart, click here.

Economic Data

Economic data continues to come in stronger than the consensus, especially manufacturing data.

The Institute for Supply Management (ISM) Manufacturing blew away Wall Street’s consensus, coming in at 59.3 from 55.4, as the Street was looking for a much smaller increase to 56.4.

• New orders: 67.9 +7.7 pp (percentage points)
• Productivity: 63.0 +2.0pp
• Backlog of orders: 55.7 +0.5pp
• Employment: 53.2 +3.6pp

To see the chart, click here.

• "COVID-19 continues to have an effect on supplier support and operations, more from a decreased labor perspective rather than unavailable material." (Computer & Electronic Products)
• "Business continues to be robust. Sales are greater than expectations, and cost pressures are modest. There is posturing by suppliers on market price increases for corrugated and polypropylene, yet no firm price increases at this time. We expect a strong finish to 2020 and a solid start in 2021." (Chemical Products)
• "Sales continue to be strong — up 4 percent this September compared to September 2019. The year-to-date level is still 21 percent below last year due to the [COVID-19] shutdown, but sales are stronger than expected and forecast to stay strong through the first quarter of 2021." (Transportation Equipment)
• "Increased production due to stores stocking up for the second wave of COVID-19." (Food, Beverage & Tobacco Products)
• "Continue to see increases in customer demand. We still are not back to pre-COVID-19 levels but are continually improving." (Fabricated Metal Products)
• "Construction materials have leveled off but continue to be at an all-time high. Mills for board sheet stock have pushed out lead times citing increasing backlogs related to the pandemic and increased supply in the housing market." (Furniture & Related Products)

Hotline Model Portfolio Approach

We continue to take action during these wild swings. We closed out an older tech position with a strong gain to redeploy funds elsewhere. 

Today’s Session

Historically, an up market three months into the election is an amazing predictor of outcome, having worked every cycle since 1984 and twenty out of last 23 election cycles.  Looks like President Trump has momentum, and it will be closer than the pundits have predicted at the very least. 

Battle Ground

Top Battlegrounds: Wisconsin, Michigan, Pennsylvania, North Carolina, Florida, Arizona

 RCP National Average | Top Battlegrounds vs. 2016 Top Battlegrounds

https://www.realclearpolitics.com/elections/trump-vs-biden-top-battleground-states/

Pennsylvania

To see the prediction chart, click here.

If you haven’t already voted, make sure you go out to vote today!