- The Dow Jones Industrial Average (DJIA) recovered from a tepid futures session to shoot higher on Wednesday.
- The latest Pew survey puts Donald Trump 10 points behind Biden in the presidential polls.
- Wells Fargo says investors are under-pricing the risk of Biden winning the White House in November.
The U.S. stock market just closed a phenomenal quarter. It looked like the first day of July would open with a limp. But the Dow Jones Industrial Average (DJIA) rallied back from a dreary futures session to mount a triple-digit gain on Wednesday.
Still, investors seem somewhat hesitant as Donald Trump’s grip on the White House fades. A new Pew online survey puts Biden 10 points ahead of Trump in the race for the presidency. Worse, the mood of the nation is increasingly bleak with Trump at the helm. An astonishing 87% of the country is dissatisfied with what they see in America right now.
Wells Fargo analyst Christopher Harvey says investors are still underestimating the impact of a Biden presidency on the financial markets.
We do think investors are underpricing the political risk [of Biden winning].
Dow shoots higher following tepid overnight session
That’s all true. But although Dow futures spent most of the overnight session in the red, the index found its footing in time for the opening bell.
As of 9:42 am ET, the Dow had rallied 179.73 points or 0.7% to 25,992.61.
The S&P 500 and Nasdaq advanced 0.52% and 0.29%, respectively, as Wall Street entered the second half of the year.
So what changed? Two things.
Most importantly, news broke that Dow 30 member Pfizer had observed positive results from an early-stage coronavirus vaccine trial. Given the state of the U.S. outbreak, this was welcome news for a stock market that doesn’t want to see the economy forced back into lockdown.
Nearly as encouraging was the latest ADP private payrolls report, which showed that the private sector had added 2.369 million jobs in June.
That was slightly below estimates, but that minor miss was overshadowed by a massive revision to ADP’s May report. After initially reporting a loss of 2.76 million jobs last month, ADP revised that reading to a net gain of 3.065 million.
Should investors fear a Biden presidency?
We know that Wall Street never wanted the radical Bernie Sanders or Elizabeth Warren in the White House. But is Joe Biden really that disruptive for the equity markets? Well, consider this statement he made yesterday:
I’m going to get rid of the bulk of Trump’s $2 trillion tax cut. And a lot of you may not like that but I’m going to close loopholes like capital gains and stepped up basis.
Trump’s tax plan was largely responsible for the stock market run-up since his election. A Biden White House puts that at risk. The possibility of a Democrat’ blue sweep’ isn’t fully baked into the market, according to Wells Fargo.
Stock market nervous as America’s mood turns angry
The mood of the nation has taken a dark turn in recent weeks, which isn’t a good sign for the incumbent president. In the same Pew survey, 71% say they feel angry about the state of the country. 66% are fearful. Only 17% are proud of America.
As a leader, Trump trails Biden in almost every category, from temperament to honesty, to understanding the needs of ordinary people.
Trump comfortably beats Biden in ‘energy’ and ties with him on courage. The only silver lining for the president is that voters aren’t particularly enthusiastic about Biden. Two-thirds of Biden voters say it’s more a protest vote against Trump than a vote for the Democrat candidate.
There’s another headwind for Trump. The vast majority of new virus cases are now in his heartland. The outbreak has hit ‘Red America’ and threatens to ravage his base even further.
The Dow Jones bull case
Despite the political risks, many analysts remain optimistic. Standard Chartered Private Bank’s Steve Brice told CNBC this morning that risk assets will continue to do well. He claims the worst of the economic shock is over.
We think any future lockdowns are unlikely to be as severe in H1 and therefore we’re going to see a global recovery continue.
JP Morgan’s Marko Kolanovic is also bullish. He says sidelined money will “pour into equities” if investors see a little more stability in the economy and the markets. Hedge funds are still cautious, with plenty of cash waiting to come into the market.
Positioning in equities is actually very low — it’s about 25% percentile across discretionary hedge funds.
The stock market bear case
Less optimistic is Mohamed El-Erian, chief economic advisor at Allianz. He believes momentum has been knocked out of the stock market with three key catalysts disappearing: stimulus measures, healthy re-openings, and retail investor inflows.
Unfortunately, all three have run out of steam for now.
He’s also nervous about the trajectory of the pandemic, which will continue to run away until we see the effects of new restrictions.
With additional reporting from CCN.com U.S. editor Josiah Wilmoth
Last modified: September 23, 2020 2:02 PM