Model Strikes Out – Major Victory – Markets Caught Off Guard – Don’t Buy Everything

Well, so much to cover, so bleary-eyed. I always stay up way too late waiting and then information seems to slow to a crawl. Early in the evening, I watched three independent betting lines and the stock market futures began to move significantly in Trump’s favor. It wasn’t even 9pm yet. That was a tell. Somehow, the markets are usually right. It’s not absolute, but it’s pretty good.

Our election model was wrong for the first time since 1992. It’s too early to understand why. It’s either that it was just wrong like in 1992 and 2028 will be another year. Or, as I wrote about, early voting changed the dynamic of the data. I will probably wait a bit and then dive in. Of the three times series of stock market returns, the middle one had it right. The longer one had it wrong. The shortest one just tipped to Harris.

Lots of things we know. Polls have become essentially useless. All of the ones I saw had it Harris or Trump by a tiny margin. Many strategists and media analysts will likely be looking for other work. Clearly there were things at play in the country that were not easily quantified.

Trump’s DJT stock didn’t forecast the election. The solar ETF, TAN, didn’t either. In last night’s video, I did leave open the case that the strong rise in interest rates shown below could be a sign that Trump would win. However, there was no previous historical data to support that over multiple elections. It looked like an outlier.

Markets had been pricing in a divided government outcome. Big money had been hedging hundreds of billions of dollars, giving stocks a lot of fuel and dry powder to explode higher. My preferred scenario was for a quick 2-5% selloff on the news and then a face-ripping rally to new highs. Instead, it looks like the market skipped the first part.

In the short-term, stocks, dollar and crypto are the big winners. Small cap stocks should benefit the most. They have been hated forever. Bonds, gold and emerging markets are the big losers. Watch how those groups close today which is way more important than where they open.

Sectors where lower regulation helps will win too. Banks for sure. Biotech and energy. However, higher rates hurt biotech because they borrow so much money. Drill baby drill means more oil supply on the market which hurts prices. Interest rate sensitive sectors like REITs and utilities are losers with the bond market falling. Same should be true of homebuilders and mortgage stocks. Alternative energy should plummet. And China? Well, let’s just say that their version of the Fed will be pumping hundreds of billions more into the economy than they had planned.

The election results are absolutely not an all-clear sign to buy anything and everything. Be thoughtful, careful and have a plan for when you’re wrong.  Some of this euphoria will wear off quickly. The trades we put on yesterday as you can see below had nothing to do with the election. They were happening regardless. The exact same thing can be said about all of the activity last week.

And let’s not forget that the Fed is meeting right now with their next rate cut coming tomorrow at 2pm.

Finally, as I said over the past week, the next president will preside over a mild recession, regardless of who wins. I have high conviction on that.

And the UCONN Huskies begin their quest for THREE-PEAT tonight!

On Tuesday we bought SPLV, more BDX, more AMPS, more RSPN and more KIE.