Republican Landslide Triggers Buying Rush, but Fed Might Play Spoiler
Optimism about economic growth and worries about being left out offset a surge in interest rates.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Market participants were expecting a very tight presidential race and were concerned that it would be so close that a clear winner wouldn't be known for days. That uncertainty would have caused some market struggles. Instead of a close race, it became clear quite quickly that Donald Trump would prevail and Republicans would gain control of the U.S. Senate and possibly the House.
This surprise result triggered optimism about a surge in economic growth as Trump initiates a series of new policies. Whether the policies will work or even be passed doesn't matter much at this point. It was a very emotional victory and created substantial "fear of missing out" and triggered a rush of aggressive buying.
The Russell 2000 IWM jumped nearly 6%, and the S&P500 was up about 2.5%, but breadth wasn't even two-to-one positive, which was surprising, given the size of the index gains. Upside volume was also a bit tepid, but over 2,000 stocks hit new 12-month highs.
The question now is whether the market can sustain this momentum for more than a day or so. There is one big immediate obstacle, which is interest rates and the Fed's interest rate decision on Thursday afternoon. Bonds are down to levels last seen in May, which suggests that there are some worries about a rebound in inflation. The market doesn't seem too concerned about it and is still anticipating a quarter-point cut at each of the next two Fed meetings.
The big danger is that Jerome Powell might signal that the Fed is backing off from its recent dovishness and may halt cuts until it has a better sense of what is happening. There will be some major political issues involved with a change in policy, as Trump has already indicated he would like more input into central bank activities.
The break-out action on the election news looks quite good technically, but there is a high risk of a quick reversal, especially if the Fed is less market-friendly. It is also very difficult to find new entries unless you are willing to buy new highs and extended names.
The news flow on Wednesday is all about the election, but on Thursday, the focus on interest rates will intensify, which could be problematic for the market.
Have a good evening. I'll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
