My Take on the Election and What to Watch in This Mind-Boggling Market
Let’s make sense of a new era where Nvidia can be down while the semiconductors are up, the blue wave, and what’s ahead.
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If you told me Nvidia (NVDA) would be down 4.3% on the same day the SOX Semiconductor Index index would rally 6.9%, I’d have been extremely skeptical. Yet it happened.
After large back-to-back gains, including Monday’s 6.9% rally, we are still lower than where we closed Wednesday night, on SOX. Ditto for Nasdaq and S&P 500. Let’s not forget how those indexes all sold off overnight, as the election results rolled in, yet, rallied throughout the day on Wednesday, only to (as already mentioned) have one of the worst selloffs in awhile on Thursday.
Yeah, so markets are confusing!
Much of this hinges upon how the market is interpreting the elections.
There is a lot of flip flopping on what the election means for the economy, market and various sectors. Here is my current take:
It was more of an anti-Trump administration vote than a move to embrace all of the Democratic party’s views. When I look at the results, I see moderate Democrats doing much better than what I would call “extreme” Democrats. If the Democrats take the message that the country wants things “fixed at the margins” rather than some mandate for far-left policies, we could be in good shape.
Many Republicans followed the administration’s line, likely at least partly out of concern that falling out of line would hurt them if the president really could get out the vote. We could see more try to do what they think is right for the people they represent (there have been some). This too would likely be good.
What the winners and losers do matter as much as anything. Friction is good, but fighting is bad. I also think going down the “impeachment” route is not helpful. I do see signs that we are going down that path. Not good for markets or the economy.
That Trump accepted the midterm results was a positive. Trump’s comments on election night helped turn futures around. So far we haven’t seen a slew of lawsuits questioning the results, which is good, too.
Could the administration shift to more moderate positions? We got some indication from the president that he could “work with” the Democrats. Promoting Stephen Miller doesn’t suggest compromise, but on the other hand, my assumption is that the president listens to his chief of staff less than any other president does.
Key Areas to Watch
After the election, I’m watching several key areas of the market closely:
Data Centers. Data centers got hit by both specific ballot items and the overall tone of the election. Debating the impact is one of the reasons markets are so volatile.
Look for some states to reach out and embrace data centers. There are states (and municipalities) that want the tax revenue. That have the space necessary along with the electricity and water. Some states will raise their end and open their doors to compute. With latency less of an issue now than it was a few years ago, that creates a lot more locations that are viable.
On those that said no, look for it as the starting point of negotiations rather than a “hard” no. The compute builders will need to do more community outreach, and to explain their plans, the good along with the bad, to communities. They are likely to shoulder more of the burden on electricity and water than they might be bearing already (or at least have a lot more clarity). I see this as making projects more expensive, not derailing them en masse (though the poorly thought out ones will likely be shelved).
I am more worried about cheap Chinese compute for valuations than I am worried about the election results.
Iran. Base case is another round of attacks and economic pressure. Then, we could see the signing of memorandum of understanding and getting back to the negotiating table, all before the newly elected officials are sworn in. Maybe I’m a bit optimistic, but if I’m right, we see some relief on energy prices.
Trade and tariffs. I am most optimistic about trade and tariffs. Agricultural areas tipped against the Trump administration. States along the borders of Canada and Mexico tipped against it, too. I would not be surprised to see some sort of “veto proof” extension of NAFTA or something else limiting tariff authority passed early in the first quarter. Many of the tariffs have done as much harm to the economy as good. This could change quickly and is great for affordability.
Anthropic is key here. How this deal is received will be the next 5% to 10% for semi’s and the Nasdaq 100. I think more downside, but again, yesterday’s rally surprised me (not that we bounced, but by how much we bounced).
World of stocks. Finally, I continue to like global stocks, more than U.S. stocks.
I checked out the iShares MSCI Poland ETF (EPOL), an ETF focused on Poland that I have liked for some time. I believe it will be a “staging” area and growth opportunity, after any Russia/Ukraine deal. I was surprised that it has outperformed the S&P 500 over the one year, three year and five year time frames. That is another thing I probably wouldn’t have bet on, but it happened.
Be careful out there, liquidity is low, forced mechanical buying and selling is high with the concentration of leveraged ETFs in the semi sector, the results of the election outcome are far from clear.
At the time of publication, Tchir was long EPOL.
