Wall Road merchants are struggling to place themselves for the election

How is Wall Street positioned for the election? Even Wall Street is not sure.

For most of October, “Buy the Stimulus Trade” was the main idea on Wall Street. Polls finally showed the odds of Biden winning were good, which would likely create some kind of large-scale incentive. Investors bought small-cap stocks, infrastructure games, and alternative energy sectors like solar, wind, and other clean energy ETFs.

Then Covid came back with a vengeance. Suddenly there was concern about another outbreak and its impact on the outcome would overwhelm the benefits of incentives.

And with concerns about lower profits, there was a new fold: tech ratings.

Who could blame traders for technical valuation concerns? Apple trades for 30 times 2021 revenue. It was trading at 20x profit in April. In the past it has made 15 to 20 times the profit. When Tim Cook refused to provide guidance, Wall Street shuddered.

And yet, with Apple, Amazon and Facebook all down more than 5% last week, much of the surplus is being worked off.

“Maybe this crazy market is not just about a technical re-evaluation, but a ‘simultaneous’ re-evaluation of technology and the general market,” said Jim Paulsen, chief marketing strategist at Leuthold. What you’ve been seeing lately is “technology that leads the sell-off, but broader games like cyclicals, trifles, and even energy overruns”.

While “stimulus trading” was wounded last week, most traders believe it still has legs.

“If there’s one topic that still works, it’s an incentive,” said Alec Young, chief investment officer at Tactical Alpha. “There are macroeconomic reasons to be positive. There is an incentive coming, a vaccine is coming, and eliminating election uncertainty will be very positive.”

With the S&P 500 down 3% from the previous month, stocks that would benefit from impulses still outperformed significantly despite concerns over a Covid outbreak.

The “stimulus game” in October

  • S&P Small Cap up 3%
  • Solar stocks rise 5%
  • Metals / Mining up 5%

Infrastructure games had a particularly strong month:

  • Fluorine increased 28%
  • Martin Marietta up 18%
  • Granite construction increased by 13%
  • Tetra Tech up 6%
  • Vulcan Materials up 6%

There are other signs that the market believes that much more momentum is coming. For example, bond yields have risen, and this has caused a big rally in banks. In a month with the S&P down 3%, bank stocks rose 12%. “Bonds were down because of concerns about the amount of debt that will have to be used to fund stimulus programs,” Young said.

Commodities are also holding up, probably in the hope that China has turned the corner. Oil, for example, is in decline, but copper is still on the up for the month.

Is the macro overlay really that bad, or is it more of a technical rating reset? For Paulsen, the relative outperformance of cyclical stocks is reason enough for him to remain optimistic: “Investors say technology can’t go much higher because it’s so expensive, but they also say broader market games can’t be much lower because they are so (relatively) cheap. “

Scratch the surface anyway and most traders seem nervous, especially about the scale of the virus outbreak. “Anyone who tells you they have a lot of confidence is lying,” Young told me.

There are even doubts that a really robust stimulus plan will come, especially if the end result is a Democrat in the White House and Republicans in control of the Senate.

Since “the election result is still uncertain, as the recent volatility has shown, the market seems to be preparing to reassess itself for the possibility of a slightly less stimulating regime,” wrote Fidelity Investment’s Jurrien Timmer in a statement on Sunday to customers.

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