Big Cyclical Election Day Rally

Huge Election Day Rally

The stock market rallied hugely on Tuesday which might be given back on Wednesday depending on how the election goes. It seems like the market started to unwind some of the protection put in place a few weeks ago. That unwind doesn’t make sense now that we know the election was close. 

However, we don’t know when the election will be decided. The longer it drags out, the worse for the stock market and the better for the treasury market. It’s interesting that the stock market is basically fine with whoever wins as long as someone wins. A tie or incomplete tally increases uncertainty in a year with so much uncertainty already due to the virus.

Tuesday Details

Tuesday had a major rally as the S&P 500 was up 1.78%. Best stocks were the cyclicals. Banks loved the temporary selloff in treasuries which ended up being reversed in the overnight session because of the election. That bears out in the indexes as the Nasdaq was up 1.85% and the Russell 2000 was up 2.91%.

Specifically, the small cap value index was up 2.7% and the Nasdaq 100 was up 1.73%. It seems to me like for this week the market decided to focus exclusively on the election and ignore COVID-19. However, the virus will come back into focus once the election is over. Cloud index rose 1.68%. It was a general rally with the banks winning. Regional banks index was up 2.77%.

Electric Vehicle Bubble Reinflates

Nio is rallying unlike anything I have ever seen. This is one of the biggest bubbles we've seen in a long time. It rose 6.5% on Tuesday, giving it a $48 billion market cap. Their stock is up 64.4% in the past month. It seems like the hot money switched from the work from home SaaS stocks to the EV stocks. 

Tesla joined in on the fun as it rose 5.8%. It’s now only down 15% from its record high. Some predicted it wouldn’t hit another record. But obviously predicting stocks like this is very tough because they are driven by fear and greed instead of actual fundamentals.

If Tesla (TSLA) was driven by the business, it would be selling off every time it loses market share to Volkswagen in Europe. As you can see from the chart above, the number of VD ID.3 registrations has beaten the total the Model 3 has even though the Model 3 had an 8 month head start. The stock is rallying because of hype that isn’t backed up by the numbers.

Tech Is Too Large

One thesis is tech is just like commodities and energy in the 2000s. In the late 2000s, agriculture and energy stocks exploded because of increased demand from emerging markets. That demand came, but supply beat it out. That’s the same with software stocks now. There will be increased demand for the digitalization of workplaces. But there are tons of companies losing money to gain market share in this arena.

Bulls think the tech companies will all turn profits as they gain scale, but they all can’t do that. Software doesn’t have high cost of goods, but it has high research and development costs and firms give out stock options to motivate managers. 

Software isn’t invincible. It will be hurt by competition. SaaS is sticky, but customers are getting smarter. They are having SaaS firms bid against each other before they get locked into contracts, so they aren’t locked into a costly endeavor.

(Click on image to enlarge)

A bullish narrative won this year which isn’t a surprise because competitive dynamics were trumped by the huge influx of demand because of social distancing. That led to the chart above which shows tech has a higher share of the S&P 500 than materials, energy, financials, and the industrials combined. 

These are massive parts of the economy that are small in relation to a few big tech firms. In addition to more competition, the biggest tech firms face regulatory risk which some bulls completely ignore.

Alphabet’s Great Earnings

Alphabet (GOOG) was the only stock to rise on earnings in the midst of the FAANG crash last Friday. The firm had a blowout quarter. They reported $16.4 in EPS which beat estimates for $11.29. Sales were $46.17 billion which destroyed estimates for $42.9 billion. Cloud business had $3.44 billion in sales which beat estimates for $3.32 billion.

The firm is starting to report Google Cloud operating income on its own in Q4. This means the company wants to highlight its greatness. It will take market share from AWS. A star of the quarter was YouTube ads which were $5.04 billion which beat estimates for $4.39 billion. That was 32% yearly growth. 

Many been noticing an increase in ad load. The company is trying to monetize YouTube as much as possible. It has almost no serious competitors unless you consider TikTok to be a new competitor.

COVID-19 Update

The market seems to be unable to focus on more than 1 thing at a time. Apparently, the election makes the pandemic unimportant for a few days. It’s good to follow the pandemic when the market isn’t because it will quickly get back to that in a couple weeks. Big news event is still the phase 3 trial update from Pfizer in 3 weeks.

On Tuesday, there were 86,507 new cases. 7 day average of cases in Wisconsin rose from 4,464 to 4,537 which shows slower, but steady growth still. Hospitalizations are quickly becoming a major problem. There were 50,340 on Tuesday which suggests this total will surpass the 60,000 peak in July. 

7 day average of deaths increased slightly to 845. This low average suggests treatment in hospitals has improved a lot since the summer. It will only improve further as the months go on. Obviously, we’d still love treatment that cuts the deaths to a miniscule total.