Wednesday, November 7, 2018, 12:41 PM, EST
- NASDAQ Composite +2.07% Dow +1.38% S&P 500 +1.54% Russell 2000 +1.02%
- NASDAQ Advancers: 1171 Decliners: 908
- Today's Volume +28.38%
- Crude -0.51% , Gold +0.25%
- The Federal Reserve begins its two day policy meeting where they are expected to leave rates unchanged in the short term
- MBA Mortgage Applications fell -4% in the week ending November 2
- DOE reports crude oil inventories +5.78M barrels vs consensus +1.8M barrels (Distillate inventories reported (3.46M) barrels vs. consensus (1.5M) barrels, Gasoline inventories reported +1.85M barrels vs. consensus (1.9M) barrels, Cushing inventories reported +2.42M barrels vs. API +3.07M barrels)
- US Christmas sales predicted to surpass $1 trillion for the first time this year (Total retail sales in the U.S will hit $1.002 trillion during the Christmas holiday period, marking the "strongest growth since 2011," according to eMarketer)
So the sun did come up again today. The markets hate uncertainty, so it is no surprise that we are trading well into the green this morning on election results that were largely expected. The Democrats took control of the House for the first time since 2010 while the Republicans maintained control of the Senate. Part of the positive sentiment to today's market action is the fact that the elections are over and uncertainty has been eliminated. Investors are now more at ease with purchasing more risky assets such as equities.
The other part, ironically is that gridlock will be good for the market, allowing the current administration's business friendly policies to continue while keeping in check some of the more controversial and disruptive moves such as the trade battle with China. It's almost a "do nothing, undo nothing scenario" and the market is showing its approval. The outcome dims chances that the Trump's administration's signature tax cuts will be reversed but it also makes it less likely that Washington will be able to push through any other major fiscal initiatives.
History has shown that stocks typically do well in a divided Congress when the White House is under Republican control. We pointed out yesterday that on average the S&P 500 produces an annual return after the elections of 12%.
In other market news the Federal Reserve is kicking off its two day policy meeting in Washington today. While recent market volatility has been tied to concern over the pace of interest rate hikes, the Fed is expected to leave rates as they are during this meeting with an eye towards a hike in December.
Economic news is relatively light today. A gauge of mortgage applications in the US fell last week to the lowest level in four years. The Mortgage Bankers Association's market composite index fell 4% during the week ending November 2nd to 316.2. The survey's contract rate on a 30 year fixed loan rose to 5.15% while a gauge of applications to purchase homes dropped 5% to the lowest level in two years. Residential investments have been a drag on economic growth for five of the past 6 quarters as high borrowing costs have hindered purchases in an already tight market with a lack of affordable listings.
Turning to the commodity space, oil is trading lower this morning after the Energy Information Administration released stockpile data that said US crude inventories rose by 5.8 million barrels in the week ending November 2nd. This was the seventh consecutive increase in US stockpiles. Analysts had expected an increase of 2.4 million barrels. Gold is rising this morning as the results of a split Congress has pressured the dollar which benefits gold. The dollar index has fallen a half of a percent against its main currency rivals, making gold more attractive for holders of other currencies
From a sector perspective all 11 major S&P sectors are trading in positive territory this morning. Health care and technology are up over 2% so far followed by consumer discretionary and communications which are up over 1% on the day. The boost in the technology sector is an indication that a divided Congress could prevent the President from going after large companies like Amazon for being too big and influential on the economy.
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Brian's Technical Take: Gridlock and QT
Today's breakout in the S&P 500 above the 2,755 level is confirmation a bottoming process has in fact been taking place throughout the equity markets over the last two weeks. Last week the SPX began making higher lows and as of today, now higher highs. Any election uncertainty that may have been holding back stocks is now in the rearview mirror.
That said, the time frame is key in terms of the bullish narrative and while the recent price action has been constructive, at the very least improving, there was enough technical damage inflicted in October that markets may have to reckon with come early next year. After all there is still the slowing global economy, US-China trade uncertainty, fading corporate earnings/revenue growth, and last but not least the Fed.
While the Federal Reserve is on a well telegraphed path of rate hikes which we learned last month could rise to restrictive, above "normalized" levels, let's not forget our central bank is also twelve months into an unprecedented plan of quantitative tightening (QT). The Federal Reserve's balance sheet peaked at $4.5T in January 2015 following multiple rounds of QE and Twists that injected liquidity into a fractured financial system stemming from the bursting of the housing bubble and Great Recession.
The balance sheet then held relatively steady until October 2017 when the Fed embarked on its QT program, a "gradual pace" of reduced purchases via slowing reinvestment. Over the last twelve months the balance sheet has fallen 7% to just over $4.1T. While the pro growth fiscal policies of the Trump administration have certainly helped to offset the headwinds of reduced stimulus, it remains to be seen if there is a lagging effect markets will have to contend with; particularly with a divided Congress. They say gridlock is good for markets, but will it be with the pace of QT now running at its peak rate of $50B a month?
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.