It’s been a game of name your narrative for a stretch in which the S&P 500 climbed 3.8% even as Donald Trump scuttled then unscuttled economic aid, virus infection rates rose and more people filed for first-time jobless claims than estimated. Since bottoming 16 days ago, the index has surged 7.4%, sailing past a presidential Covid-19 diagnosis and one of the more contentious electoral debates.
Through it all the market has remained impressively buoyant, both at the surface and beneath. Gauges of transportation, building and semiconductor stocks all sit at records, while industrial companies are surging in what is an endorsement of the economy in the view of DataTrek Research. A measure of market breath, the accumulative advance-decline line for the S&P 500, hit an all-time high during the week.
Following are all the theories on what’s driving the gains.
Small-cap companies, perceived beneficiaries of the stalled relief package in Congress, have rallied sharply amid optimism over further government aid. The Russell 2000 Index jumped 6.4% over five days for the best week in four months. Solar and building stocks also jumped, buoyed by the prospects of an increase in infrastructure and green-energy spending, an agenda advocated by Democrats. Even marijuana stocks caught a bid after Kamala Harris, the Democratic candidate for vice president, mentioned decriminalization.
The markets “are moving from a fixation on a growth slowdown, which was starting to grip in August and early September, to the idea that the cycle will be rebooted through the fiscal stimulus under a Democratic sweep,” John Normand, a JPMorgan Chase & Co. strategist, said in an interview on Bloomberg Television and Radio. “And if there is a reboot, we’re talking about an extension that’s going on for quite a while.”
Normand also said the market is vulnerable if the Senate doesn’t flip to Democrats and the impasse around fiscal policy persists. Right now, the odds for a Democratic sweep are only a bit better than a coin-toss, standing at about 60%, according to PredictIt.
“If it’s a divided government, whether it’s under Biden or Trump, you do have the risk of a decent slowdown in the U.S. economy and unwinding of the optimism that has been lifting markets over the past couple of weeks,” Normand said. “All of this optimism about the fiscal stimulus, the sweep and a reboot of the cycle is going to collapse.”
“The market got ahead of itself in August, when the election was not that big a deal,” said Shaoul, chief executive officer at Marketfield Asset Management LLC. “We had a real correction in September. I think you did take a lot of the unhealthy froth out of the market at that point.”
Still, Shaoul says politics may have played a role in bolstering investor sentiment. While unsure that a Democratic sweep will work in favor of the economy long-term, he says, Biden’s improving chances at least pointed to a clear-cut result in November. Partly driven the prospects of a contested election, option traders have stepped up hedges against market turmoil way past Election Day into December.
That risk is seen as having eased in recent days. According to a survey of investors and corporate clients by Evercore ISI earlier this week, 76% of respondents anticipated clarity on the winner within a week of Election Day, up from 63% two weeks ago.
“If there’s one thing we can say about 2020, is we’re all thoroughly sick and tired with the degree of uncertainty that we live with on a day-to-day basis,” Shaoul said. “The idea that the election can be settled in a normal democratic way at the beginning of November is understandably appealing to people.”
Never mind the back-fit narratives, says El-Erian, the president of Cambridge University’s Queens’ College. The only thing anyone can say with confidence is that investors remain in buying mode. Thanks to Fed support, the S&P 500 has fully erased its decline during the bear market, surging as much as 60% from its March trough.
“Increasingly this market believes there is no alternative to equities, equities are your risk mitigator, equities are your upside claim, equities can do everything for you because everything else looks worse than equities,” El-Erian said. “That has worked. So there is a massive fear of missing out.”
Buying the dip continues to be a mind-numbingly successful strategy. Purchasing S&P 500 stocks at the open on days after the benchmark posted a decline of at least 1%, then selling them at the close would have yielded a return of 19% this year. That’s double the gain from a buy-and-hold strategy.
“Now the behavior happens quickly. You buy immediately and then you look for a narrative to justify why we bounced up,” El-Erian said. “The market will hear what it wants to hear, and right now, this market wants to go higher.”