Making Sense of the Market

“The stock market is never obvious. It is designed to fool most of the people, most of the time.”

• Jesse Livermore

As I write this, there is still not a declared winner in the 2020 election although it would appear that Joe Biden looks poised to secure the necessary 270 electoral votes. Regardless of the ultimate outcome, the reaction from the stock market has been perplexing to most. Prior to November 3^rd, a common concern was a Biden victory coupled with a stock market decline. Now that we have some more clarity (although still a decent amount of opacity), why would the market not only go up, but go up by a lot?

For starters, it is typically a futile effort to attempt to extract a reason for a market move. There are millions of market participants with different opinions, investment objectives, and time frames. As I discussed in my blog, The Narrative Fallacy, human beings need to tell stories to make sense of the world around us. Assigning a reason to something allows us to simplify an incredibly complex system like the stock market into a narrative that just makes sense. However, it is much more important to focus on *what* is happening rather than *why* it is happening. With that in mind, let’s look at what exactly happened in the last 48 hours.

 

Relative Winners

After cooling off since their peak on September 2^nd, the big tech names came flying out of the gate at 9:30 AM on November 4^th. The NASDAQ-100 index is up almost 10% this week with popular names like Apple, Microsoft, and Amazon leading the way. This is interesting to note since it had been a relative underperformer leading up to the election. As you can see in the chart below, the Russell 2000 (small companies) outperformed both the S&P 500 and NASDAQ-100 by over 5% in the month of October. There was speculation that this was institutions positioning for a “blue wave” which would potentially pave the way for easier stimulus spending. Easier stimulus would mean potentially higher inflation which would reduce the need to pay up for these high growth names. Whether this is true or not is unimportant as we know. If we zoom out, we can see that the long-term trend for these companies is still very much intact.

Exhibit 1

Relative Losers

Not much! Stocks were up and bonds were up which is what concerns most people. Looking beneath the surface, we saw some weakness from regional banks. Without getting too far off topic, investor appetite for their stocks is driven in large part by what longer-term rates are. Yesterday we saw the yield on a 10-year U.S. Treasury note fall from 0.9% to 0.77%. As a refresher, as more people look to buy bonds, the price of bonds goes up while the yield of bonds goes down. To relate it to an earlier point, if the market fears inflation, the desire to hold something that pays you a fixed rate with no growth potential decreases. Leading up to the election, the rate on the 10-year note climbed from 0.5% to its high of 0.9%. A reversal of these expectations would mean, at least for now, that those expectations have taken a break.

 

It has been an eventful couple of days in the market to say the least, however much of what you see on a daily basis is just noise. The moves that we have seen could just be the result of an “overcrowded” trade being unwound. Again, it doesn’t matter why. Staying on an even keel while focusing on what really matters for your money is the key to long-term success.

 

This article was featured in the Saratogian on November 7th, 2020.