By Dave Zellner
Chief Investment Officer
November 9, 2020
While an emotionally tumultuous week for partisans on both sides of the political divide, the market was anything but, with U.S. equities climbing 7.4% during the week, as represented by the S&P 500. It was the strongest week for stocks since the April bounce back from the mid-February-to-mid-March 34% market decline. This defied expectations. Many market observers had anticipated that a “blue wave” would boost markets, as they assumed this would bring meaningful economic stimulus. But these same observers were left confounded by significant stock gains, even as prospects of a split government and uncertainty around the Presidential winner increased.
As it goes with every major market move, commentators rush to rationalize the contributing factors. Sometimes there are sound fundamental reasons, for example geopolitical conflict, a poor economic report, disruption in the commodities market, etc. But often times, there are purely “technical” factors that lead to market moves, for example computer algorithms that operate without awareness of fundamental economic factors, or very large institutional investors that seek to hedge their investments in the immediate short-term to avoid the small probability of major market losses.
One plausible explanation for last week’s stock gains can be attributed to this type of hedging activity by major institutional investors leading up to the election. While these investors generally did not have election predictions, they used esoteric derivative trading strategies to protect their investment portfolios from the potential risk associated with short-term election-related volatility and market shock.
While in the days following the presidential election there remained uncertainty about the winner, investors were given some clarity regarding the new makeup of Congress, as Republican Congressional candidates generally fared much better than polling projections. I believe once these major institutional investors gained some insight and realized that other investors did not panic during election week, regardless of the lingering uncertainty, they felt comfortable unwinding their hedging strategies which magnified the gains on Wall Street, boosting markets. One should note that last week’s gains still were not enough to offset market declines experienced from mid-October through the end of the month.
Over the weekend, major news networks declared former Vice President Joe Biden the election winner, bringing some clarity. But with lawsuits and challenges remaining to be resolved, even if they are unlikely to change the Presidential outcome, and with two runoff election in Georgia that will determine the balance of power in the U.S. Senate, we may still face some uncertainty ahead. All said, short-term market noise should not concern long-term investors. As I mentioned in my October 28 post regarding U.S. elections and the financial markets, Wespath positions its investments with a long-term view. We are guided by our long-standing Investment Beliefs, and we believe that attempts to “time” the markets are a loser’s game. We remain steadfast in our optimistic worldview belief that the world will follow a path of modest, but sustainable economic growth led by the developing world. We remain disciplined in fulfilling our fiduciary obligations to you, our valued participant and institutional stakeholders.
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