- While the polls suggest a blue wave victory is in reach for Democrats this November, the stock market isn’t so sure, according to a note from Evercore ISI.
- Wall Street strategists have been forecasting that a blue wave would likely be positive for stocks on hopes of a large stimulus deal shortly after the election, which would help spur a surge in value and cyclical stocks.
- But this week’s rotation out of value and into tech suggests that chances of a blue wave in November are less likely, according to the note.
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Wall Street is increasingly expecting a blue wave victory for Democrats this November after the polls close, which would likely lead to the reflation trade: a surge in cyclical and value stocks at the expense of technology and growth stocks.
But recent trading activity in the stock market suggests odds of a blue wave are less likely, according to a Tuesday note from Evercore ISI.
Specifically, this week’s rotation out of small cap and value and into large cap and growth could be chalked up to declining odds of a Democratic sweep, according to the note.
The firm pointed to the October surprise in North Carolina’s Senate race between Republican Thom Tillis and Democrat Cal Cunningham as evidence for declining chances of Democrats overtaking the Senate.
“The Democratic ‘dream fiscal program’ odds are lower,” Evercore said as explanation for what is driving the rotation back into tech.
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The firm did concede that other factors could be moving tech stocks, including excitement around Amazon Prime Day and Apple’s iPhone 12 event, and increased Fed support due to a steady rise in daily COVID-19 cases.
But one sector that has been representative of a Democratic sweep in recent weeks has begun to turn south: solar stocks.
Evercore pointed out that solar stocks have seen a steady rise as odds of a Joe Biden presidency have increased.
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The solar ETF TAN dropped 6% over the past week of trading activity, potentially suggesting that investors view a Biden presidency or blue wave this November as less likely than they did in recent weeks.
But it could also be that solar stocks are consolidating and digesting gains after a massive run. The Solar ETF TAN is up 140% year-to-date.
Whether or not the stock market is sending signals of what’s going to happen this November, UBS pointed out that the risk exists that anything but a blue wave this November would be a disappointment for investors and lead to a market selloff.
If too much optimism is priced in too soon, it could lead to a “perverse situation in which investors are disappointed if a Blue Wave doesn’t happen,” UBS said.
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