Worst Day Ever For Regional Bank Stocks

Massive Sector Rotation To Tech & Healthcare

Presidential & Senate election caused a massive sector rotation. Premise is that there won’t be a tax hike because the GOP won the Senate, but there won’t be a grand stimulus either. That’s perfect for the long bond and tech. It’s terrible for the banks, cyclicals, and value stocks. The election also had a trade unwind as people were hedged in case of a disaster. 

It’s interesting because you can argue the worst case scenario happened in that the presidential election hasn’t been called yet. This rally led to people saying stocks would have increased no matter what happened. It turns out, fearing the election is a mistake. So many people feared it for no reason. COVID-19 crisis is a much bigger deal.

This market was so insane, United Healthcare rose 10.33%. This is a $337 billion company that usually isn’t volatile. Clearly, the market had other plans. Amazon (AMZN) stock rose 6.3%. Tesla (TSLA) actually fell 69 basis points because the Dems won’t pass sweeping legislation that helps green energy. 

TAN solar ETF fell 2.1%. With the massive decline from 93.4 basis points before the election to 72.8 basis points as of Thursday morning, the TLT rose 2.2%. Since the S&P 500 also rose 2.2%, they rose the most combined since April. The chart below shows the combination as of mid-day when the stock market was higher. Point still stands.

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Disastrous Day For Value Stocks (Regional Banks)

Nasdaq (NDX) increased 3.85% while the Russell 2000 (IWM) rose a measly 5 basis points. Every time it seems like small cap value is going to defeat large cap growth, a reversal happens. Nasdaq 100 rose a massive 4.5%, while the small cap value index fell 2.1%. 

As you can see from the chart below, the value factor had its worst day versus growth since 2001. Furthermore, the cloud index rose 5.7%. That’s a 7.5% rise in 2 days. What an oversold rally! Nio rose another 6.2% which gave it 74.7% returns in the past month. This is a bubble of epic proportions. It makes no sense.

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Because of the large decline in the 10 year yield and the fact that regional banks had been on a great run, the regional bank index fell a massive 7.1%. Many have never seen anything like this. That means cloud stocks beat them by 12.8% in just one day. 

As you can see from the chart below, the regional banks index underperformed the S&P 500 by the most ever. Zions Bancorporation (ZION) fell 10.2% and Huntington Bancshares fell 9.1%. Large cap banks were surprisingly mostly immune to this onslaught as Citigroup (C) fell 3.3% and Wells Fargo (WFC) fell 1%.

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Even though Joe Biden isn’t considered friendly to fracking, oil stocks didn’t fall much. Main trade was pricing in no stimulus. Dems were hoping to win the Senate and they didn’t. That’s why the oil services index only fell 86 basis points.

This Is An Overreaction

Within a couple days, this trade will be over. If we get positive news on Pfizer’s (PFE) vaccine later this month and rumblings of a smaller stimulus, we will still have a cyclical recovery. It won’t be the monster expansion many envisioned, but it will still help the economy. 

Biden wants a stimulus and the GOP only barely holds the Senate. Dems just need to convince one or two Republicans to join in to pass a bill. The intermediate term trend is higher for yields. This is a minor setback that looks major now. When we look back at this in 1-2 months, we will realize it was a great time to short the TLT.  

One other reason it didn't make sense to mention as to why the big tech stocks rallied is that there is less of a chance of antitrust legislation against them now that there is a mixed government. And their rally is an overreaction because, in fact, going against tech is a bipartisan issue. 

Neither the GOP nor the Dems like big tech. They dislike tech for different reasons, but they might be able to come together in their mutual disdain for these firms.

COVID-19 Still A Big Issue

Even though markets and the media are almost exclusively focused on the election, COVID-19 is still a big story unfortunately. Wednesday’s data was very bad. It’s possible the election caused the virus to spread more. We will see about that within a week or two. However, it might be tough to tell because cases are already exploding. It’s like lighting a match and throwing it on a fire that’s already large. 

As you can see from the chart below, there were 1.2 million tests which is slightly below the record high, but there were 103,087 positive cases which is by far a new record high. That means the positive rate increased again. This is an uncontrolled virus unlike in Europe where its cases have peaked.

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It was a terrible day for Wisconsin as the 7 day moving average of cases increased from 4,537 to 4,839 which is a new record. As a result of this influx in cases in the past few weeks, the number of people hospitalized spiked to 52,049 which is very close to the summer high of 60,000. At this pace, we will see it pass that peak in less than 10 days.

It’s possible that we could get a new record high in hospitalizations adjusted for the lack of reporting in the spring. There is no chance of a national mask mandate coming in time to potentially end this wave before the winter. As far as the market is concerned, if positive vaccine news comes out in 2-3 weeks, the market will completely ignore this wave since COVID-19 will be gone by the spring (if the vaccine works).