Saturday, January 28, 2023

Large Cap Rally Rolls On


It’s often been said that the stock market dislikes uncertainty. So it may be a little bit of a surprise that the market rally is continuing as votes are still being counted in a United States presidential race that has so far been too close to call.

Instead of focusing on the outcome of the presidential contest, it seems that investors are putting more weight on chances of gridlock in Congress that might keep sweeping action on healthcare, taxes and tech firms from moving forward no matter who ends up in the Oval Office. It seems that market participants are basically thinking the outcome in Washington will result in a continuation of the status quo for Wall Street, which has been doing pretty well considering the pandemic is far from contained.

But, given the action in the Treasury market, where demand for the relative safety of U.S. government debt has been on the rise, it seems that there is still some worry in the back of investors’ minds that the potential gridlock in Washington could dent chances for a larger stimulus package. Such aid for the economy has been on Wall Street’s wish list for some time now. Investors apparently think a stimulus package could help the economic recovery by boosting consumer spending.

In the meantime, it looks like the investor love for tech-related companies has room to continue. The Tech sector has partially been helped by gains in chipmakers and component suppliers. That trend continued this morning, with Qualcomm (NASDAQ:) shares up roughly 14% after reporting earnings and revenue that came in ahead of expectations. Investors also appeared pleased by the chipmaker’s current quarter forecast amid the rollout of 5G phones.

On the economic front, initial weekly jobless claims came in at 751,000, which is 7,000 less than a week ago. We may get a clearer picture of the jobs landscape tomorrow when we get the report from the Bureau of Labor Statistics. Then, of course, this afternoon we’ll hear from . Although interest rates are unlikely to change, it’ll be interesting to see what the Fed has to say about the overall economy and their thoughts on the stimulus.

The “Gridlock” Trade?

On Wednesday, all of the main three U.S. stock indices rose by considerable percentages, and the Cboe Volatility Index () fell below 30 amid outsize gains in the Health Care, Communication Services, Information Technology, and Consumer Discretionary sectors.

Uncertainty wasn’t totally banished from Wall Street on Wednesday. Investors were demanding the relative safety of U.S. government debt amid political uncertainty (though as we’ll see in a moment, there may be more to the story on Treasuries amid what we’ll call the “gridlock trade”).

The flattening yield curve, and its potential to drag on net interest income for banks, proved to be a headwind for the Financials sector Wednesday. The Russell 2000 , which contains a big chunk of regional banks, was only able to manage a scant gain despite the wider market rally. RUT futures are doing better this morning but they’re not up as much in percentage terms as futures on the three main U.S. indices.

Gains in the FAANG stocks helped things along as investors seemed to continue to want the perceived safety of these mega cap names. With inventors wanting to stay in the stock market for yield but uncertainty about the coronavirus pandemics still high, it looks like the tech-related names are still a popular trade.

Investors may have also been piling into those names because they’re thinking that gridlock on Capitol Hill means that the favorable trading conditions that have helped lift these stocks could continue. Also, chances of a split Congress could be mitigating some of the concerns people had about possible regulatory threats to the tech industry under a Democratic Senate—a scenario that’s looking less likely.

Perhaps the “gridlock trade” dynamic punctuates the main themes since the election—big tech surging, small caps lagging, and Treasury yields falling. Recall that prior to the election, FAANGs had lagged the broader market, and RUT had at times taken the lead. Meanwhile, the had picked up about 20 basis points from mid-October to election day. If small caps were banking on “reflation” (which could also nudge interest rates higher), the market seems to be unwinding some of that, and shifting back to mega-caps.

And when you add in yesterday’s action in Caterpillar (NYSE:), which fell over 7%, it’s clear to see the market is pricing in a less voracious appetite for infrastructure spending. But remember: There are still plenty of pieces that have yet to be placed into the election 2020 jigsaw puzzle. We’re still a long way from having things locked in place.

Looking to the Fed

Even with election and stimulus uncertainty still dogging Wall Street, it seems that there is a certain amount of stability to the market because of expectations the Fed will do whatever it can to help out the economy.

The Fed’s last meeting reinforced ideas that it has no plans to raise rates for many years, and no action is expected on that front today. But investors will probably still want to tune in this afternoon for the commentary that goes along with the rate announcement.

Comments from Fed Chairman ’s at post-announcement press conferences always have the potential to move the market.

That could happen if Powell talks about the election results, or lack thereof, and whether they have any impact on future policy. Investors also would probably like to hear more about whether the Fed has more policy moves up its sleeve if Congress and the White House can’t agree on fiscal stimulus, which Powell and other Fed members have said there is a need for.

Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Chart Of The Day

VIX SLIDE CONTINUES. The Cboe Volatility Index (VIX) wasted little time in moving back to the mid-20s post-election after having pierced the 40 mark late last week. Still, since the first coronavirus scare back in March, VIX hasn’t broken the 20 mark—a level seen by many as the dividing line between “normal” and “elevated” volatility. Data source: Cboe Global Markets (NYSE:).

Dissecting the FAANGs: Investors closely follow the FAANG stocks because of their sheer size and how widely held they are. There’s no doubt that ups and downs in their shares can move the market. They also tend to be lumped together in the Big Tech trade, even though they straddle three different sectors. Facebook (NASDAQ:), Alphabet (NASDAQ:), and Netflix (NASDAQ:) are in the Communication Services sector while Amazon (NASDAQ:) is in the Consumer Discretionary sector. Only one is categorized in the Information Technology sector, and that’s Apple (NASDAQ:). With so much interest in tech-related names as the market looks for relatively stable places, it can be helpful to remember that these names do have different fundamentals. For example, NFLX seems to be more of a pure play stay-at-home trade than does AAPL, which has physical stores affected by social distancing rules.

Health Care Sector Gets Shot in the Arm: With the tech-heavy outshining the other two main U.S. indices by a good margin yesterday, technology companies continue to be in the spotlight. But it was interesting to note that the S&P 500 Index’s Information Technology sector was only the third best performing sector for the day on Wednesday. The Communication Services sector took second place, led higher by an 8.32% gain in FB. But it was the Health Care sector that led the way among sectors with a 4.45% gain. It seems that investors are thinking gridlock in Washington won’t result in any major overhaul in healthcare law. Biogen (NASDAQ:), Cigna (NYSE:), Eli Lilly (NYSE:),Anthem (ANTM), and UnitedHealth (NYSE:) all recorded double digit gains on the day. Much of the gains for Biogen, which was the biggest gainer in the sector, came on positive news from the FDA regarding the company’s experimental Alzheimer’s medication. That news may have also helped LLY, which is developing an Alzheimer’s blood test.

Hospitals Hurting: But there was another side to the gridlock coin yesterday for health care companies. While drugmakers and insurance companies did well, hospital operators didn’t. In the SPX, HCA Holdings (NYSE:) and Universal Health Services (NYSE:) both fell. Other hospital operators Community Health Systems (NYSE:) and Tenet Healthcare (NYSE:) dropped as well. It seems that for hospitals, investors may be looking beyond the election toward the highest court in the land. “Hospital stocks fell because they have the most to lose if the Supreme Court invalidates the Affordable Care Act,” according to Axios. “And a divided Congress wouldn’t allow Biden to come up with an ACA replacement.”

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