Elections, the pandemic and markets all had a wild ride this past week. Markets and economics by nature are apolitical, they side with whoever they think will make companies more money and shares more dear. Especially given the bitter political infighting in the US in the past few years, this blog has tried to avoid getting sucked into the political news cycle and media coverage of the current President. The first reason being because I don’t believe the day to day obsession of the news media of comments or tweets adds any value in terms of analysis or policy perspective and the second reason being because many of the issues discussed here cross political lines.
However, the results of the past week have an impact in terms of global public sentiment going forward. What’s more is that I have had a chance at the same time in the past week to attend some virtual conferences which offered viewpoints from some great global minds when it comes to these topics which helped mold my perspective for what we have seen and what we can expect going forward.
Elections
The first takeaway besides the election result, which was informally called by the mainstream news media this past Saturday and essentially accepted by most of the general public on the same day, was that as I predicted , the polls were way off. That they were so off will likely get lost in the fact that the presidential outcome was correctly predicted in terms of a binary choice. For all the talk of a blue wave though, the electorate showed itself to be much more conservative than many commentators would give it credit for.
This is evidenced in the many results of ballot initiatives that were voted on in the perennial blue state of California. When you look closer, rather than neatly aligning with ideals on the left, voters in California showed themselves to be centrists who cherry pick policies from both sides of the aisle. On the left, prop 24 expanded data privacy in a state where big tech rules and prop 17 allows felons on parol the right to vote, both of which passed. However, there were a slew of initiatives that were more conservative leaning in their results. These included defeating an initiative that would have brought back affirmative action, defeating an initiative that denied more benefits for contract workers, rejecting an end to cash bail and the rejection of an expansion of rent control.
These outcomes couples with the fact that the senate is essentially split until runoff elections in Georgia and that the Democrats lost seats in the house, point towards the idea that the incoming administration will be forced to be much more centrist oriented than some had predicted had the blue wave materialized. If Republicans control the senate, they will still have a majority say over the many appointees to key positions in the various departments that the President has to name. Far left thinkers are almost sure to be rejected.
Outside of the US, who is President mean different things to different countries. China doesn’t get a good outcome either way. Another Trump administration would have meant continued fighting over tariffs and trade, a Biden administration now means that alliances and policy harmonization between the US and it’s NATO allies will strengthen again, dealing a blow for Chinese influence in Europe and other countries allied with the US. Russia loses a soft ally in Trump and also doesn’t benefit from closer NATO unity.
Vaccines and the Market Reaction
Speaking of other unofficial announcements that shook things up, Monday morning Pfizer announced that its vaccine had done much better than expected in phase 3 trials with a 90% effective rate. This is even better than the effectiveness of the flu shots we get every year and about as effective as the much maligned but essential MMR vaccine which is currently widely distributed. The timing and emergency approval of this vaccine could come as fast as November end.
Other vaccines being developed by big drug makers are not far behind and could see emergency approval and rollout be December. The next issue seems to be turning towards distribution with many experts seeing a 6-8 month distribution timeframe for the general public to have wide and easy access to a vaccine. Whether many will want to take it is the next public health and political campaign we have on the horizon.
Markets surged on the news from Pfizer. If 2020 was the year of tech, November 9th was the “risk on” day of 2020. If ever there was an argument as to why to stay invested and not try to time the markets, it was this Monday. Carnival Cruises surged 39%, Casino operator Wynn 28%, Lyft rose 26% and JetBlue 22%. Losers included Zoom, down 17% and Peloton down 20%. The Nasdaq ended up falling 1.6% while the Russel 2000 jumped 3.7% and during the trading day was as tending as high as up 6%. The Russel, which is more made up of smaller and more traditional companies compared to the tech heavy Nasdaq has returned 48.7% in the past 5 years while the Nasdaq has returned 135.4%. In fact, the Russel still has not recovered from its peak reached in August of 2018. Mid caps and small cap US stocks have severely underperformed big tech and tech in general since 2018, pulled down by a slump in energy as well as a general softness in traditional business sectors including banking. Below you can see the graphical representation of this, with the Nasdaq in green, Russel 2000 in blue and the small cap and mid cap indexes represented by the ETF’s VB and MDY respectively. These are the Vanguard Small Cap Index and the S&P 500 Midcap Index funds.
Being a contrarian, such as an emerging markets or value investor has been an exercise in self flagellation for the past decade. Tech has grown leaps and bounds and led to what some perceive as a new tech bubble comparable to that of the late 90’s. Just as in the late 90’s, the financial media has been fixated with the small number of investors that have turned small savings into fortunes by rising the momentum wave. This may not necessarily be set to end in itself as markets can be risk on as well as continuing momentum that follows a general technology trend which existed even before the pandemic gave it a shot in the arm.
What has become clear now is that investors anticipated this day would come and were on edge to try and pile back into cyclical stocks in anticipation of something looking like a normalization of the economy and the upswing in the economic cycle that is part of all recoveries.
This is where the big investors could tap their experience and knowledge of economic cycles, use the traditional market piping and flood the market with liquidity to push those shares I mentioned to levels not seen since the crisis in terms of single day returns. Meanwhile, the Robinhood crowd, riding high from their tech heavy returns and attempting to tap the wave as well, saw many online brokerages crash again so that many ended up missing the single day rally.
Banks were another big winner as investors anticipated consumers coming back in full force. Bank of America saw its shares rise 14% in one day, a massive rally for a company with a market cap of over $200 billion which spoke to the conviction to which investors have in terms of being bullish on cyclicals.
Avoid Conventional Wisdom
Conventional wisdom would have you thinking that it’s time to take a rest on tech and maybe take some gains from the cyclical rally now. Strong secular trends however, can surprise to the upside. There was talk like this after 2010 and 2011 saw rallies after the economy had started to heal itself after the crisis and the US was downgraded by S&P. Many investors thought it was time to take a break, this ended up merely being a pause and the S&P 500 has climbed 150% since then.
It’s those days that surprise to the upside that make all the difference. JP Morgan did a study last year that looked at the period from 1999 to 2018 end and found that just missing the 10 best days in a 20 year period could cut your cumulative return by more than 50%. If you miss the 20 best days, your entire return is wiped out.
In addition, the study found that the biggest gaining days were often right after some of the worst days. 6 of the 10 best gaining days were found within 2 weeks of the worst days.
Not only is this a strong argument to stay invested, but also points to a strategy for those of you with little capital to be able to take advantage of deep downswings in the market. With the knowledge that large upswings come within a few weeks of large downturns, one could purchase in the money or at the money options which are a month out from expiration when there is a large downturn. This way when the upturn comes, you could make a quick windfall profit from the volatility and i veritable upside. This could be done without having to bet on an individual company by just purchasing ETF options for index tracking ETF’s like SPY.
So hopefully you were diversified enough to experience the rally and disciplined enough to have your money in play to be in the right position on Monday morning. If these are easy for you already, think of stepping it up by enhancing your returns, not by getting out and parking funds into cash but taking advantage of the volatility through options. It was a week to remember in more ways than one.
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