The post-election bullish battle cry was a resolute “back to fundamentals!” With the market surging, analysts were proclaiming “reduced uncertainty” and “the best possible outcome for the markets.” The President and Nancy Pelosi both adopted restrained tones and spoke of efforts to cooperate on important bipartisan legislation. Prospects for a market-pleasing infrastructure spending bill have improved. What’s more, a positive spin was put on the return of Washington gridlock. Less Treasury issuance would support lower market yields generally, ensuring the U.S. economic expansion maintains ample of room to run. The weaker post-election dollar was said to be constructive for global liquidity.The EEM emerging market ETF rose 1.9% Wednesday, pushing the rally from October 29th lows to 11.0%. The South African rand and Indonesian rupiah gained 1.5%, as most EM currencies temporarily benefited from the weaker dollar.
Wednesday provided a good example of news and analysis following market direction. Stocks were up, so election results must have been positive. I would tend to see Wednesday’s trading as heavily impacted by the unwind of hedges – and yet another short squeeze. After trading as high as 20.6 in Tuesday trading, the VIX (equities volatility) index ended Wednesday’s session at 16.36, an almost one-month low.
Market weakness in the weeks leading up to the midterms created an unusual backdrop. A pivotal election combined with a vulnerable market backdrop ensured a double-dose of hedging activity heading into Tuesday.