Back to Reality… A second consecutive “Vaccine Monday” made the proverbial “light at the end of the tunnel” that much brighter for 2021, but investors are following up another Rotation burst with a more wary assessment of the more immediate obstacles blocking that tunnel exit. In addition to the daily list of states announcing new virus curbs, and an October Retail Sales print that showed slowing growth, Republican senators reminded last night they remain opposed to any large scale stimulus. That caused enough concern to spark a bit of an unwind to yesterday’s rotation, and the usual 3 Value suspects Banks, Energy, and Autos were the worst performers shortly after the open. However, sentiment has evened out as the day’s progressed (VLUE was underperforming MTUM by 1.9% at 10am, but is now only -0.6% relative) and indices are attempting to fight their way back to their unchanged marks. Now Healthcare is at the bottom of the pile, with CVS (-8.9%) and other pharmacy names (WBA -9%, RAD -16%, GDRX -20%) feeling sick about Amazon’s (AMZN +0.7%) foray into the space, and Boston Scientific (BSX -8.9%) falling after initiating a recall of one of its heart valves. Retail and Food Retail are also red following a poor reception for earnings beats from Home Depot (HD -3.0%) and Walmart (WMT -0.6%) [another sign winners may be topped out?]. More defensives sectors like Household Goods and Real Estate are faring best today, along with Apparel stocks which are benefitting from broker upgrades.

I’ll See Your 90%… – And raise you to 94.5%. Keep giving us Mondays like this and the Sunday scaries will be a thing of the past! We felt the Moderna news might be imminent and indeed it was, following up Pfizer’s announcement 7 days ago with a trial result that has even greater efficacy. (The timing was good too as further vaccine/treatments may be on hold for awhile and COVID figures are going the wrong way in the short-term and foreseeable future.) The reaction was as predictable as it was familiar, although last week’s bookend performances were so robust for the value/rotation trade that it’s stunted some of today’s still impressive move. The stay at home names that got hammered on Pfizer’s announcement weathered today’s news quite well; the when/if we’ve got a handle on this virus will not result in a binary work outcome. But travel and leisure will be and airliners took flight on vaccine part two. Those jets are going to need some fuel and crude/energy names followed suit. Banks, already buoyed by the morning news, got another boost when PNC paid $11.6bn for BBVa’s US unit, increasing hopes for further consolidation in the space.

Within distance – It’s been a great week for stocks and the broader indexes are getting close to hitting new highs.  If markets get a late push (anything can happen in the last 15 minutes), both the Russell and SPX could eclipse their previous bests.  All sectors are in the green, with Energy (shrugging off Oil weakness) in the top spot.  Banks are also trading well today, with the BKX up 2.16%.  Retail is the laggard, held back by Etsy (-1.3%) and Amazon (-52bps).  The WFH beneficiaries (including mega tech) are actually trading lower (Zoom -10%, Peloton -6.7%, Wayfair -5.2%), but that impact is not making it to the indexes.  If indexes close at current levels, the S&P will finish +1.7% for the week, Nasdaq -1.07%, and Russell 2K +5.3%.  A new trend forming there?

Deep Breaths… If yesterday was a “pause for breath” after a whirlwind start to the week, today feels like the first exhale of some of the vaccine cheer that’s been a boost to equities. With virus cases quickly heading in the wrong direction, shutdowns (partial at least) looking inevitable this winter, and any vaccine distribution plan lacking medical and logistical finality, there are plenty of near-term clouds obscuring investors’ view of a sunnier 2021. What began as a mild pullback this morning has become a bit more exaggerated, with Powell failing to save the day with anything new in his comments at the ECB forum, only reminding that the next months will be “challenging.” The ball is still in Congress’s court in terms of stimulus, but the only movement on that front was the White House announcing it will leave the House / Senate to get negotiations going again (apparently the WH is busy with “other things”…). All the above has led stocks to continue to fade into the afternoon. Defensive sectors Healthcare and Food Retail have been the best of the worst for most of the day but now Media has taken over the top spot as the usual winners get some of their mojo back (relatively speaking). Consequently Banks, Autos, and Energy are back in their usual place in the basement of the sector table. It was fun while it lasted? The debate continues…

They Can’t All Be Like Yesterday… The way the week started off, you half expected to come in today and hear that a Brexit trade deal had been negotiated and that Congress passed a stimulus package… But alas, US equities are once again subject to gravity after flying higher on Monday. Still that hasn’t stopped rotation game from being played (VLUE +1.3%, MTUM -1.2%), just not nearly to the same extent as yesterday’s frenzy. Tech/Semis are the laggards again, with an extra drag from Amazon (AMZN -3.0%) staring down EU antitrust investigations. Joining them in the red today is Banks (+13% yday), bringing into question how far any “Great Rotation” will carry the battered sector. Monday’s other big sector winner, Energy (+14% yday) is also cooled off a bit but remains in positive territory. Industrials are leading, namely Autos and Cap Goods (Boeing +5% as it reportedly nears 737 MAX approval). Transports are also outperforming, but that’s thanks to freight names (CSX +3.7%, KSU +2.3%) carrying the load as airlines come down from their vaccine high (AAL -4.1% after being first to pull the trigger on a stock offering). With the S&P pretty much unchanged and the 10-year Treasury yield still hovering around yesterday’s highs, the market can’t be accused over letting too much of yesterday’s jubilance slip away yet, but the big question is whether the party will last or start to fade into year-end…

Resolution Reaction – We do have a winner, but this feels far from over. No doubt there will continue to be a slew of headlines over the next few weeks, calling the results of the election into question as President Trump has offered little indication he is prepared to concede defeat. Further, Trump has also refused to commit to a peaceful transfer of power. Both moves would be historical firsts, but most likely not all that surprising to market participants. Whatever your political alliances, the markets are behaving in a way that suggests investors are quite happy that at least the bulk of uncertainty is behind us. However, the election results pale in comparison to the market’s reaction to Pfizer (+11.2%) and BioNTech’s (+14.6%) vaccine progress announcement this morning. The headlines gave the markets quite a jolt, reversing the fortunes of pandemic losers such as travel companies (Carnival +37%), retailers (Kohl’s +17%) and banks (JP Morgan Chase +13.5%). On the other hand, virus related beneficiaries are seeing a decent pullback. See: Zoom (-13%), Peloton (-15%), and of course, Netflix (-6.2%). Value is outperforming Growth by 4%+ and the Russell, with its broader contingency of US economic sensitive names, is making new YTD highs. Also, JNK is loving it. second best day in 10 yrs for JNK US. (New total return high last week already.) Further, the 10y has jumped to 0.954% from 0.821%, crude is up more than 8.5%, and the safety trades – Yen, Gold, and Bunds are all enduring the opposite of risk assets. Ain’t no stopping the bull run now…..except maybe a hefty dose of reality…

Let’s Never Do This Again… Well it appears that investors ready for the weekend… After a looong week that saw the S&P notch 4 consecutive gains of over +1% (first time since 1982), today’s session feels like a bit of a pause for breath as investors as investors regather their bearings. At the moment, Biden looks all but certain to lock up the presidency, while the fate of the Senate may need to be decided by two runoff elections in Georgia in January (but still looks good for Republicans). While indices are little changed on the day, trading has still been choppy (vols +20% vs 20-day avg) as political headlines are still managing to keep jumpy traders on edge despite a conclusion nearing. Semis have also refused to calm down, with SOX making a new all-time price and 12-month relative as Microchip (MCHP +5.2%) earnings impressed last night. Telcos are also enjoying an earnings glow with T-Mobile (TMUS +6.0%) dialing up a beat and smashing expectations for costs savings from its merger with Sprint. Value sectors are dragging once again after their joining the party yesterday: Energy, Banks, and Autos are all among the worst performers. While there’s no doubt the election litigation will drag on for weeks, hopefully by Monday the market’s focus can return to the prospect of stimulus…

Everyone into the pool – Votes are still being counted, and lawsuits are flying, but markets are still reacting as if a quick outcome will occur.  What is known though is that no Blue Wave is coming.  That realization yesterday forced a quick move away from those perceived winners (Industrials/ Banks/ Material), and back into the YTD leaders (mega tech/ Semis). The approach today is more all-encompassing, with yesterday’s losers leading.  Materials/ Metals are +5%, Banks +4.1% and Transportation +3.3%.  Homebuilders are lagging (ITB +16bps), but they were up 5% Wednesday.  As the Value guys play a little catch up, mega teach and Semis are also performing.  Earnings from Qualcomm (+13.4%) and Qorvo (+7.7%) reminded the market again why the sector is +34% this year.  If the major equity indexes were testing their technical levels Monday, they are above them now, and even the Russell 2000 is at an 8 month high. 

About Last Night… Look this has been fun, but maybe it’s best if we end things? The market is taking it all relatively well (VIX still sitting below 30) considering the election night surprises and lingering uncertainty, and indices have extended gains post-EU close (but are off their highs). That comes as vote counts continue to trend well for Biden, who is now carrying narrow leads in both Wisconsin and Michigan, where he could be declared the unofficial victor as soon as this afternoon (going a long way to sealing the deal even without PA’s help). What is more concrete is that Democrats’ hoped for Blue Wave is not going to materialize, and whoever is President will be dealing with a split Congress. The promise of a Republican Senate has prompted a strong tide of rotation rewind as investors adjust expectations for a skinnier stimulus package (MTUM +5.0% vs VLUE +1.1%; QQQ +4.8% vs IWM +0.4%,) — still stocks have gotten an extra bid over the last few hours as Senate Leader McConnell promised a stimulus deal would be “top priority” when the body reconvenes next week. Tech / Media / Semis are all outperforming amid the return to growth / winning trades; in addition, reduced concerns of reform / regulation are helping Big Tech as well as the Healthcare / Pharma names. Treasury yields remain under pressure as the political rollercoaster certainly hasn’t come to a full stop, but the 10-year yield is only back to the range it occupied last week. It may be days before all the votes are finally tallied (and then expect some recounts), but if they’re all days like this, the bulls are fine with that.

One. More. Day. We are more than ready for this to be over. Both 2020 AND The presidential election. Of course, it may be more than just one day until things are official. Further, the financial implications of the outcome might not be as clear cut as many expect. If the popular narrative of a “blue wave” comes to fruition, we most likely see a weaker dollar, recovery in value stocks and a steepening yield curve. But there are a few other potential outcomes: 1) a contested election which would cause more than a little uncertainty and disharmony – UGGHHHH, 2) A “gridlock” scenario with Biden White House and Republican Senate. The Senate would then act as the last line of defense vs fiscal deficit spending and endanger the market’s anticipated multi-trillion dollar stimulus expectations for Q1. Or 3) Trump repeats a 2016 shock victory. In that case, the Fed policy will be easy, no matter who is in The White House. Also, speaking in strict market terms—according to Macro Man, the performance of the stock market in the first year after a presidential election is pretty indistinguishable, regardless of whether the incumbent party retains or loses power. The returns in one year have been generally pretty good over the past 35 years. No matter what the outcome tomorrow, investors have had plenty of time to position for any of the above results. Perhaps today’s slight squeeze by the S&P and Dow is just further reshuffling. The usual suspects —tech/large cap/growth names are not feeling the same love. The Nasdaq is underperforming the other 2 major indices for once with Amazon (-2.8%), Apple (-1.4%) and Microsoft (-1.1%) well into the red, despite more than OK earnings last week. One thing to note — the SPX rarely closes down the day before an election, according to The Market Ear. That said, this year is unlike any other. Deep breaths.