Market Insights: Performance Post U.S. Elections

Macroeconomic and Market Developments:

• Equity markets in North America reversed last week’s losses this week. The TSX Composite in Canada was up 4.51% and in the US, the S&P500 jumped 7.31% and the Dow rose 6.86%.
• Similarly, the Canadian dollar also popped this week, bouncing back to 76.6 cents, up from 75.0 cents last Friday.
• Gold rallied strongly this week, rising to $1,952 from $1,878 last Friday.
• North American oil prices somewhat recovered last week’s losses this week. US WTI bounced back from approximately $35.50 to around $37.50 this Friday. Western Canadian Select bounced back from approximately $25 to roughly $28 this week.
• The big news event this week was definitely the US election on Tuesday night. The Democrats managed to hold onto the House of Representatives and for now, the Republicans hold the Senate. However, as of Friday afternoon the world is still waiting to find out if Former Vice-President Joe Biden or current President Donald Trump will be the president for the next four years.
• On Monday, the US released the ISM Manufacturing Index showing that manufacturing soared in October, with the ISM index notching its highest reading in more than two years. The index rose to 59.3 in October, easily beating the consensus expected 56.0. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)
• Tuesday saw Canada release its Trade Deficit numbers. Canada's September trade balance came in with a trade deficit of $3.3B, slightly larger compared with a revised deficit of $3.2B in August. Analysts had been looking for a slight narrowing of the deficit to $2.4B compared with August's original figure of a deficit of $2.5B.
• On Wednesday, Calgary-based Tourmaline (TOU) announced the acquisition of two private companies, Modern Resources and Jupiter Resources, giving the company an additional 76,000 BOE/d of current production. In a related transaction, Tourmaline will sell a gross overriding royalty ("GORR") on the Modern and Jupiter lands to related company Topaz Energy Corp (TPZ).
• On Friday morning, Statistics Canada reported the Canadian economy gained 84,000 jobs in October, slightly ahead of consensus. The unemployment rate came in at 8.9%, down slightly from 9.0% in September. As expected, jobs growth slowed sharply after growing by an average of 2.7% per month since May. Around 378,000 jobs were added in September and 246,000 in August.
• In the US, non-farm payrolls increased by 638,000 in October and the unemployment rate fell to 6.9%. Economists surveyed by Dow Jones had forecast 530,000 and 7.7% respectively, slightly lower than the September level of 7.9%. October’s gain was just slightly off the September pace of 672,000.
• The global COVID-19 cases continued to climb, with total cases now at roughly 49.1 million and total deaths at roughly 1.24 million. In Canada, total cases in Canada increased to 251,338, with active cases at 32,959. For Alberta, we have 6,230 active cases.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker: COVID TRACKER

Charts of the Week:

Vote counting continued Friday in a very tight presidential race; however, current odds are giving Biden a 96.7% chance of winning. In addition, a split congress looks the most likely outcome, with the Republicans retaining potentially at least 51 senate seats at current projection. Although the Democrats will maintain power in the House, what we found interesting is that the GOP have actually taken House seats back from the Democrats (currently +6 net GOP) which was a low probability outcome prior to election day. If this is the final outcome, although not a common occurrence in this case, history shows that a Democratic President and split Congress has been very market-friendly for stocks with calendar year returns averaging 13.6% under such a political makeup. In fact, of all the scenarios, it is the most market-friendly of all going back to 1944.

          Sources: CFRA Research, CNBC

In hindsight, the market was reacting positively on Monday and Tuesday in anticipation of this set-up. As this scenario became more likely, we have seen further gains the last two days, with the S&P 500 up over 1% for four straight days this week. We then saw a pause heading into the weekend.

The positive reaction to gridlock in Washington is likely due to a Republican Senate, meaning that large tax hikes are off the table, providing support for corporate earnings and market valuations. We have also seen a boost for technology stocks this week as a divided government is likely to keep in check the ongoing antitrust scrutiny of some of the mega cap tech names. Lastly, a Biden victory would likely see an improvement in the U.S.-China trade relationship.

Last week, we entered what is known as the seasonally strong period for equities. Since 1977, the S&P/TSX Composite (Canadian equity markets) has been seasonally strongest during November and December typically finishing each year strong. As always, past performance is not indicative of future results, but this is normally an added tailwind for equities from November through April.

             Sources: Canaccord Genuity & Capital IQ

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Government of Alberta, Johns Hopkins, oilprice.com, Canaccord Genuity, Action Network Inc., Capital IQ, CNBC, CFRA Research