Election clarity sparks a surge: Dow +3% as investors bet on divided government and an end to the Iran war

BOOM! What a day it was……When we woke up yesterday we found out that the country turned BLUE and let’s be clear – it was not a wave, it was a tsunami – the Democrats taking over both the House and Senate - and with that comes a whole set of new questions about government spending, the Iran war, the AI buildout, the border, taxation and so much more.

Stocks initially struggled overnight as investors around the world considered the implications about what had just happened….. and then it happened……The bulls came charging in.

At the end of the day – the Dow gained 3%, the S&P up 1.6%, the Nasdaq +1.4%, the Russell up 1.6%, the Transports up 1.1%, the Equal Weight S&P up 1.9% while the Mag 7 gained 2.2%.

Recall all the talk about ‘election uncertainty’ that has been weighing on the markets – the possible combinations of outcomes creating all kinds of volatility…Markets, investors and even the traders and algos unsure of the reaction from day to day…..and then – the election was over – the outcome was VERY clear – even clearer than what so many expected…so now investors began considering whether a divided government could put some limits on additional spending and reduce the frequency of ‘Trump surprises’.

7 of the 11 S&P sectors exploded higher…Consumer Discretionary gained 4.3%, Financials + 3.5%, Consumer Staples + 3.3%, Communications + 3.5%, Healthcare +3%, Real Estate + 3.3%, Basic Materials + 2.5%.

Homebuilders up 5.4%, Retailers up 5.5%, Airlines up 6.7% (oil), The Value Trade up 2%, Big Pharma + 3%, Biotech + 2.7%, even the Dividend Aristocrats joined the party – surging by 3.1%.

Where did we see weakness? Industrials lost 1% and the Tech sector - XLK - ended flat, Semis lost 3.4%, Cyber gained 0.1%, Software added 0.9%, Quantum gave back 1.2%, while Memory names dropped 5.3%. We also saw weakness in the Aerospace & Defense sector down 1.5% as the Dems will push back on more defense spending.

The hyperscalers rallied—MSFT gained 6.7%, AMZN added 6%, GOOG rose 3.2% and META gained 1.4% while the digital infrastructure companies – the companies building and operating the data centers got HAMMERED….HUT8 – 23%, IREN – 11%, CORZ – 10%, APLD – 6.7%..

So, what’s up with that? Well, remember that the Democrats campaigned on tighter regulations, and greater scrutiny – think delay, delay, delay…..So now think about who WRITES the checks…and who GETS the checks. Investors are betting that greater scrutiny and regulation will slow the data-center buildout. For the chipmakers, equipment suppliers and industrial names tied to the buildout, slower construction raises questions about the timing of new data centers, new orders and ultimately revenues. For smaller companies financing aggressive expansion, delays could make the math more difficult.

For the hyperscalers writing those big checks - a slower buildout could mean spending gets spread out over a longer period, easing near-term pressure on cash flow and make their existing computing capacity more valuable. Same development…very different consequences.

But there was another major development that added fuel to the fire.

Oil got HAMMERED. WTI plunged $7.97, or 8.3%, to settle at $88.12, while Brent dropped $8.98, or 8.7%, to $94.62 – finishing at their lowest levels in more than two months. And this happened despite an unexpected decline in US crude inventories.

Investors were betting that the election would increase pressure to bring the Iran war to an end. Vice President Vance’s criticism of the war – saying that ‘the reason we lost (the election) is the war’…… only added to that argument………. leaving many investors to bet that Trump was going to face growing pressure (at home) to end the conflict.

And this goes to my earlier comments over the past couple of months as the conflict dragged on…..the Iranians - betting that IF Trump got neutered during the mid-terms - that would work in their favor….and the chances of de-escalation and a peace agreement might follow and if that happens – then the price of oil should collapse….. and that is what we saw yesterday.

Overnight oil fell a bit further – trading as low as $86.65 before buyers came in taking it back to $88.60 – think short term oversold. From a chart perspective – we broke the short term trendline support at $90.95 leaving us in the $83.50/$90.95 trading range. (Think intermediate trendline support/short term trendline resistance). Now if it appears as if that won’t happen and Trump becomes more determined to win this fight – we could see oil surge again.

And bonds…what did they do? They rallied…the TLT up 0.8% while the TLH gained 0.75%.....the 2 yr fell 5 bps to end the day yielding 4.58%, the 10 yr lost 8 bps to end the day yielding 4.88% and the 30 yr fell 5 bps to end the day at 5.27%.

Gold exploded higher as well up $200 over 2 days…. trading at $4,131 this morning. Falling treasury yields and falling oil prices giving gold bugs a reason to buy. In addition – it did kiss the oversold level on the RSI scale when it was trading at $3,850. Trendline resistance is just ahead at $4,200.

And then there was the eco data…..and it offered some reassurance. October’s ISM Services PMI came in at 54.5, down slightly from September’s 54.9, while S&P Global Services PMI came in at 56.1 – down as well - but still comfortably in expansion territory (> 50). ADP reported 86,000 additional private-sector jobs vs. the 67k expected – another bonus. In the end – the services economy continued growing and employers continued hiring – and since we are a 75% services economy that is good.

Eco data today includes the Challenger Job Cuts y/y, and it showed that cuts (layoffs) fell by 71% - another positive. We will also get the usual suspects – Initial Jobless Claims and Cont. Claims as well as Unit Labor Costs – which are expected to be down from last months read and if that is true – that is just another positive for the economy and for inflationary pressures.

Earnings today include COP - energy, CI and CAH - healthcare, PH - industrials, SO and DUK - utilities, RL and TPR - consumer discretionary. After the bell - ABNB – travel, NET - cloud and cybersecurity, EOG and DVN - energy. MNST, AFRM and SPG round out the picture with updates on beverages, consumer credit and shopping-mall real estate.

European markets are all higher…. Spain in the lead – up 1.4%.... Italy carrying up the rear at +0.25%. Everyone else is in between.

US futures are mostly higher… Dow futures up 224 pts, S&P’s up 10 pts, the Nasdaq is down 140 pts while the Russell is up 12.

The S&P closed at 7,688 – up 120 pts.- A powerful rally for sure…. but we remain in the 7500/7800 trading range…and now comes the test….. Will the Bulls push the index higher – first thru 7700 then thru 7,800 and then if they do, will they HOLD it there? Until that happens, we’ve got a big bounce within the range. Watch for the follow-through…and remember, 7,500 remains the key support level.

The Nasdaq at 25,736 is smack in the middle of its range…25,000/26,250. So we can ask the same question…will the bulls push us up and thru intermediate term resistance and if they do -can they then push us up and short-term resistance at 26,530. If they do that – then the all time high of 27,600 is within sight and would represent a 7.3% move from here.

Chicken marsala

Prep time: 20m

Cook time: 20m

Total time: 40m

Serves: 4-6

Ingredients

6 thin-sliced chicken cutlets

1 lb sliced button/cremini mushrooms. flour s&p

3/4 c Marsala Wine

3/4 c Chicken Stock

1 Chopped shallot, olive oil, butter, fresh parsley

Preparation

Step 1

Pat the chicken dry, season with s&p, then lightly dredge in flour, shaking off the excess.

Step 2

Heat olive oil and butter in a large skillet over medium-high heat. Sauté the cutlets until golden, about 3 minutes per side depending on thickness. Remove to a plate.

Step 3

Add the mushrooms to the pan and let them brown…. Add the shallot and cook for another minute.

Step 4

Take the pan off the heat, pour in the Marsala, then return it to the stove. Scrape up those browned bits and simmer until the wine reduces by about half. Add the stock and any juices from the chicken plate. Let the sauce bubble gently until it begins to thicken.

Step 5

Return the chicken to the pan and simmer until cooked through—165°F in the thickest part. Turn off the heat and swirl in the remaining 2 tablespoons of butter. Taste, adjust the seasoning and finish with chopped parsley.

Step 6

When serving - spoon the sauce over the cutlets.