For the last several weeks a narrative has taken hold that the election would be extremely contentious and the uncertainty of the results would weigh on the market. A downtrend in the indices since October 12 seems to have confirmed this view but the market has firmed up and is gapping higher Tuesday morning. The strength has caught many folks by surprise and there is repositioning now in case the strength continues as the election unfolds.
This positive action seems to indicate that fears about an uncertain outcome are receding and the market is looking ahead to a massive fiscal stimulus deal. Concerns about missing out on a post-election rally are overtaking the worries about a massive legal battle over vote counting.
In the short term, a Biden victory and Democratic control of the Senate will likely produce the biggest market reaction as it assures a major fiscal stimulus bill of at least $2 trillion to $3 trillion. Other policy issues, such as tax increases, will quickly come into play but this market’s drug of choice is more stimulus and that is what it will react to at first.
Both sides are declaring an advantage but what it will come down to is whether the Republicans see sufficient turnout Tuesday to overcome early Biden leads. While the final results won’t come quickly there will be some early indications as states like Florida and Ohio report.
Many market players have been looking ahead to a sizable rally once the uncertainty of the election is resolved. However, the market is a discounting mechanism and many investors are trying to anticipate what will happen. The view seems to be that whatever difficulties may occur, we will overcome them quickly and the market will rally from here. That is what is driving things right now.
The big question in the short term is how much volatility we see as the election unfolds. There is very likely to be a constant flow of rumor that one side or the other has an advantage but the main issue will be clarity of the outcome. There will be some concerns about civil unrest as well but it probably is anticipated enough not to be a major surprise if some rioting does occur.
At this point, there isn’t much to do but wait to see how things unfold. My game plan is to focus on those names that I favor fundamentally and watch for entry points. When the market is driven by news flow like it is right now it is much more difficult to use technical patterns to predict where things are heading. While charts are great money management tools in a difficult environment they aren’t very good at predicting the news.
It will be difficult to make major moves so be patient and be prepared for more aggressive action Wednesday.