How to Play The Post-Election Relief Rally
Back when I was an aerospace/defense correspondent, I regularly traveled to air shows in distant lands. I remember pulling up to the gate in, say, New Zealand or Singapore, after an 18-hour flight, and then sitting on the tarmac for another 15 minutes waiting for the attendants to open the door. Those final few minutes seemed interminable.
That’s what this post-election limbo feels like. The presidential election is over but…not quite.
Regardless, election challenges are fizzling and a new president will be sworn in on January 20. Wall Street already is looking ahead to 2021 and expects political stability combined with economic growth. Below, I’ll examine the post-election relief rally and how to play it.
New record highs…
The Dow Jones Industrial Average on Monday jumped 470.63 points (+1.60%), the S&P 500 rose 41.76 points (+1.16%), and the tech-heavy NASDAQ climbed 94.84 points (+0.80%). Both the Dow and S&P 500 closed at new record highs.
In pre-market futures trading Tuesday morning, stocks were poised to open mixed, as vaccine hopes collided with the reality of rising coronavirus cases.
Earnings are a bright spot. To date for the third quarter of 2020, 92% of S&P 500 companies have reported actual results, with 84% of companies reporting a positive earnings surprise and 78% a positive revenue surprise. If 84% turns out to be the final percentage, it will tie the level for the highest percentage of S&P 500 companies reporting a positive earnings surprise since research firm FactSet began tracking this metric in 2008.
The Q3 blended year-over-year earnings decline for the S&P 500 is -7.1%. “Blended” combines actual results for companies that have reported and estimated results for companies yet to report. If -7.1% is the actual decline for the quarter, it will mark the third largest year-over-year decline in earnings reported by the index since Q3 2009, which was -15.8%.
Here’s the good news: On September 30, the estimated earnings decline for Q3 2020 was -21.2%. All eleven sectors have smaller earnings declines or higher earnings growth rates today (compared to September 30 estimates) due to positive earnings surprises.
Analysts predict a year-over-year decline in earnings in the fourth quarter (-10.8%) of 2020. However, they also project a return to earnings growth starting in the first quarter of 2021 (+14.5%).
Comparing the behavior of the market before and after the presidential election is a case study in how investor emotions often triumph over the hard data.
More S&P 500 companies beat earnings estimates (86% vs. 78%) before election day and by a wider median difference (+13.0% vs. +10.9%), according to FactSet. However, the share price movements for S&P 500 companies reporting positive earnings surprises were less related to earnings performance and more related to uncertainty before the election versus certainty after the election (see chart).
Reports after the election about the emergence of viable vaccines are fueling the rally as well. In recent days drugmakers Pfizer (NYSE: PFE) and Moderna (NSDQ: MRNA) have announced promising results of vaccines in widespread trials.
A vaccine won’t solve the coronavirus pandemic overnight and the mounting rates of infections and deaths from the pandemic are truly horrific. However, the news from Pfizer and Moderna provides tangible hope that the crisis will one day end. The coronavirus could mutate into a milder form that becomes “endemic” and a perennial occurrence, much like the common flu, but that’s another topic for another day.
To profitably position your portfolio in the waning weeks of 2020, start making bets on the sectors that are likely to soar when economic growth returns next year. These sectors include infrastructure-related construction; biotechnology; robotics; marijuana; renewable energy; and work-at-home technologies.
Marijuana is a particularly compelling theme. Ballot initiatives to remove restrictions on cannabis passed in several states on November 3, indicating that demand for pot will soar next year and beyond. To learn the details of the best marijuana plays now, click here for a free report.
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