It is clearly a legitimate question as to what the stock market is thinking here.
We had a near-1,000-point pop in the Dow on Monday and Tuesday. Maybe some of this was purely a technical bounce from oversold levels, but some and likely most was an anticipation of a big “blue wave” and all the gobs of fiscal stimulus that would entail.
Well, there was no blue wave. Donald Trump looks as though he will lose the White House, but that is it for the Democrats. It is a bittersweet victory for them. Their representation in the House declined three seats and that wasn’t supposed to happen. And in the days leading up to the election, the polls were suggesting the Democrats could take the Senate, too. That obviously didn’t happen.
So, no blue wave means no big stimulus. But the stock market surged anyway. Why?
It’s not about being irrational. It’s about what the market is seeing. It may be tunnel vision, and I certainly think that is the case, but there is a reason why the market soars on visions of big fiscal spending, and then soars when the odds of that are obliterated. All of a sudden, the attention turns to no tax hikes, and at the margin, the prior correction in the growth stocks reflected selling ahead of any prospective increase in capital gains taxes. Now the investors that sold are buying back these stocks because, with the Senate in GOP hands, there ain’t no tax hikes coming of any kind. And if you recall, Joe Biden’s corporate tax hike plan would have shaved the future business profit trend by 10 per cent. Well, that’s out of the picture, and the markets like that.
I know what you’re thinking. The market is choosing what it wants to focus on in any given day. Did I mention tunnel vision? One day it’s salivating over public sector spending and ignoring tax hikes down the road. The next day it’s salivating over no tax increases and ignoring the fact that a big fiscal stimulus isn’t happening so long as Mitch McConnell leads the charge in the Senate. A classic case of “tails I win, heads I win.”
But there is a much bigger picture narrative here that is bullish and here it is, and I really hope this does not offend my Democratic friends. Remember – I’m Canadian. However, here is the reality as I see it.
First, despite the fact that Mr. Trump lost (or seems to have), he made it much closer than the polls suggested; for them this was a far bigger miss than was the case with Hillary Clinton. Outside of his hardcore base, everyone knows about the President’s character, or lack thereof. Mr. Trump never had a period when he had better than a 50 per cent approval rating and he went into the election with just a 45 per cent score. Everyone knows this and knew it four years ago, too. Yet, let’s face facts – he still nearly won. That says a lot. And it says a lot about the current state of the Democratic Party.
That party’s platform would be a tour de force in Europe and win landslides in Canada. But that is not America. Mr. Trump nearly won despite his own low likeability ratings. The Democrats woefully underperformed expectations in the House and Senate. So the electorate said that, no, sorry, despite the pockets of support out there for the likes of Bernie Sanders (who I actually like and think is brilliant) and Elizabeth Warren, we are not all-in on green energy, massive income redistribution, taxing capital, modern monetary theory and reregulation of wide swaths of the economy.
No sense denying this message.
And that is why the stock market, the heartbeat of capitalism, responded to this electoral message – because it was a message that said loud and clear, to the world and at home, that “we are a centre-right country, and will never be centre-left, under any circumstances.” End of story. The notion in the primaries that the United States would ever become more like Europe (or Canada) has now been put to rest. And the equity market Wednesday – and Thursday so far – put an exclamation mark on that assessment.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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David Rosenberg