Investors bought their way through the uncertainty around the U.S. presidential election, sending all equity indexes sharply higher. With the results still in the balance, investors plunged into sectors like technology and healthcare with confidence that a split Congress for the next four years will continue to be good for returns (more below).
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The Nasdaq ripped to its best one-day gain in seven months as the specter of higher taxes faded and the passage of California's Proposition 22 flashed green lights ahead. Financial and industrial stocks sank as the prospects of a big stimulus bill in the very near future sank. U.S. Treasury bond yields fell for the same reason as investors raced back into growth stocks in tech and healthcare.
We said there would be headline risk in the coming days and today was a case in point. With the election still undecided, everything that popped today can fizzle tomorrow.
Just ask anyone who was betting on the outcome of the presidential race last night.
Split Congress is Good for Stocks
With the strong likelihood that the U.S. Senate and House of Representatives will remain split no matter who wins the Oval Office, investors can look to recent history to realize that this might work out well for equity prices. According to LPL Financial, a split Congress has delivered far better returns than a Congress dominated by one of the parties (chart above). Additionally, in years with a divided Congress, stocks have been higher the past 10 times, with 2020 potentially being the 11th in a row.
The theory is that the two parties will keep each other in check on issues like taxes and regulation. That is playing out right before our eyes, even as the presidential election is still undecided.
Tech and Gig Companies
The undisputed winners of this undecided election are tech and healthcare stocks, and a split Congress is exactly what they were looking for.
Tax-Friendly Times Continue
Tech stocks, which have been the drivers of the stock market rally all year, and really for the past decade, have been benefitting from President Trump's tax cuts of 2017. Even if Joe Biden wins the election, the Senate would try to block the corporate tax increases he promised throughout his campaign. That's huge news for the FAAMG and friends stocks.
Prop. 22 Passes
In addition, the passage of Proposition 22 in California, which allows gig economy companies like Uber and Lyft to classify their drivers as contractors, paves the way for more technology companies to use more contractors rather than full-time employees. That, and the tax rate staying where it is for the foreseeable future, is the election result tech companies were hoping for.
A split Congress was also exactly what health insurance companies were hoping for. President Trump has vowed to eliminate Obamacare for the last four years, but a Democrat House has stopped him, and will likely stop him again if he wins reelection. Joe Biden has promised to expand it, which would also face challenges if he were elected. In any case, the worst case for health insurance companies like United Health (UNH), Anthem Health (ANTM), and Cigna (CI), is off the table. They posted huge gains today, and UNH and ANTM hit record highs.
Hospital Stocks Sink
Hospital stocks, like Tenet (THC) and Universal Health Services (UHS), may have benefitted from a rollback of Obamacare as eliminating the insurance requirements it made into law would mean more direct payments to hospitals.
To be sure, there are still many unanswered questions about this election and its potential outcomes, so these one-day sector moves are very vulnerable to headline risk. There will be a lot of it in the coming days.
Cannabis Investors Seem Dazed and Confused
We might've expected a bigger buzz from cannabis investors stoked on the fact that New Jersey, Arizona, South Dakota, and Montana approved ballot measures to legalize recreational marijuana. But most of the top cannabis stocks, including Tilray (TLRY), Aurora (ACB) and Cronos (CRON), sold off hard today.
It might be a case of investors buying the rumors and selling news as we have seen many times in the cannabis patch. Or investors are waiting to see if Joe Biden wins the White House and follows through on his pledge to decriminalize marijuana.