Doomsday Market Predictions Give Way to Never-Ending Rally

(Bloomberg) -- They’ve faced down everything from the fastest bear market in history to barrels of oil selling for less than nothing. After traumas like that, it’ll take more than a messy election to derail bulls in the 2020 stock market.

A close or contested outcome to the U.S. presidential vote was supposed to be Wall Street’s worst-case scenario. Now, it’s come to pass. Investors needed roughly an hour to shake it off.

As they adjusted to the horse race between Donald Trump and Joe Biden, early overnight volatility in stock futures was replaced by a broad rally. The benchmark S&P 500 Index jumped more than 3%. The tech-focused Nasdaq 100 surged more than 4%.

It’s all a far cry from the dramatic predictions of what a contested result would mean. Remarkable as it sounds, as nerves settle and clarity on the vote emerges, people on the Street are predicting more gains to come.

“With the chances of a significant increase in tax rates and headwinds to cash return largely off the table, the S&P has about 13% upside from yesterday’s close,” Dennis DeBusschere at Evercore ISI wrote in a note to clients. “Either a narrow Biden victory or Trump’s re-election would push that slightly higher.”

Steeled by months of upheaval, buttressed by bottomless Federal Reserve support, that brand of confidence was all over Wall Street the day after the vote. Things were looking upbeat over at JPMorgan Chase & Co., where traders spent the morning bracing for a busy session. So far, it’s been more of a wait-and see mode, said Troy Rohrbaugh, global head of markets at JPMorgan, the world’s biggest firm by trading revenue. But there was no lack of excitement among the traders on the floor.

“When I came in early today there were a reasonably large number of people on the floor,” Rohrbaugh said. “I think they were hoping for it to be busy. As a trader, these types of events -- days that are busy and unexpected -- are what you live for.”

Liquidity has been solid so far, Rohrbaugh said, and spreads reasonable. Sure, a decisive victory by either side would have brought clarity needed to make big directional bets. But a divided government comes with upsides, too.

Consider that a President Biden could walk back the trade war, but probably not push a tax hike through a Republican-controlled Senate. Chances of any major legislation passing could be slim. The tech giants leading Wednesday’s bounce may be in no danger of imminent tougher regulations.

Microsoft Corp., Apple Inc., Amazon.com Inc. and Alphabet Inc. were five of the six biggest drivers of the S&P 500’s rally. It’s a return to a trade that because of its haven qualities has been a big winner for most of the year.

“People said back in March and April that tech is a safe play. This sentiment is now returning -- big time,” Matt Maley, chief market strategist at Miller Tabak + Co, said by phone. “If a capital gains tax isn’t going to be increased, all those investors waiting to take chips off table in their tech positions are now saying, ‘You know what, I’ll hold on.’”

The downside of a divided legislature is that the stimulus floodgates may not open, and the shares of companies most exposed to the economic cycle are underperforming.

Banks -- especially vulnerable because they’re hurt both by the slowdown and low interest rates -- were some of the worst performers on Wednesday. JPMorgan Chase & Co. and Bank of America Corp. were two of the biggest drags on the S&P 500.

Meanwhile, the election still has to be settled. Trump has already falsely claimed victory, said counting should stop and pledged to go to the U.S. Supreme Court, though his meaning was unclear.

“The absolute low point of the night, hands down, was seeing the currently-sitting president of the United States intimating that certain legally cast votes shouldn’t be counted,” Keith Buchanan, portfolio manager at GLOBALT Investments, said in a phone interview. “From a market participant standpoint, that is the most fear-inducing and volatility-inducing point of the evening.”

But investors were ready for volatility in the build-up to the vote. The Cboe Volatility Index, the options-derived measure of expected price swings for the S&P 500 known as the VIX, was above 40 a week ago compared with a one-year average of less than 28.

“The whole market was braced,” said James Masserio, co-head of equities and equity derivatives for the Americas at Societe Generale. “We were running special election risk scenarios: What happens if you have this kind of sector rotation? What happens if you have rates and equities move? Everybody saw this coming.”

The VIX dropped 6.5 basis points as of 12:33 p.m. in New York.

“Everyone kind of knew, no matter what, the results weren’t going to happen last night,” said Varghese Thomas, president and COO of TradingScreen. “Everyone’s buckled in and ready for the ride. And so far it hasn’t been as bumpy from a markets perspective.”

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