A “Blue Wave” trade developed over the past two weeks in which investors bought stocks that would theoretically benefit from a potential $5-6 trillion dollar infrastructure spending and stimulus bill (which Democrats have been pushing for). This put a strong bid under economically sensitive areas like financial services (banks especially), industrials, materials and energy (especially clean energy). The losers in the Blue Wave scenario were those areas that might be hit by greater regulation, especially the health care and pharma stocks. Technology stocks were relative underperformers during this time, not because of the bill per se, but because with so many sectors expected to be lifted by increased spending, they were no longer the only sector with promising growth prospects. Bonds, as one might expect, traded lower all October as more stimulus threatened to ultimately produce inflation.
While we understood the rationale for the moves the market was making, we were not persuaded that the thesis was correct. As such, we did not shift portfolios in October toward economically sensitive companies. As it happened, there was clearly no Blue Wave and the stimulus, if we get one, is not expected to exceed one trillion. The markets are reversing course today. Health and tech stocks have benefited since the election, but banks are feeling some pain. Bonds are performing well and pushing yields lower. I’m not sure, from a stock market standpoint, it matters who eventually is declared the winner of the presidential race. Eventually it will in terms of trade policy, but from a budget and regulatory standpoint the market is likely to regard the election business as usual.
There is one caveat to the above – a president must be declared in the next several days. A prolonged battle for the White House – with lawyers, mobs, and demonstrations – wasn’t good for the market in 2000 and probably wouldn’t be this time around either.
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