Morning Notes — Value Pause

Election: Equities are higher again today as markets bake-in a Biden and McConnell outcome. Trump still has a path to 270 and a certain GOP Senate majority waits for final results of Georgia. State law requires a candidate take >50% of the vote to win or face a runoff election.  The ‘called’ Senate races have the tally at 48 seats for both Republicans and Democrats with AK, NC and two seats in GA remaining.  Anything is possible, but at this point a certain GOP majority (avoiding a run-off in GA) would probably result in a faster/cleaner fiscal relief bill with McConnell now sounding ready to put a bill that includes state/local aid before the lame duck session.  De-risking higher tax rates and increased regulations should continue to add broad equity support for a few weeks, but the noticeable tailwind will likely fade by early next week.  Bond yields have now unwound their pre-election move higher with expectations for next week to provide incremental clarity on fiscal relief.

Sectors: You don’t necessarily need large-scale fiscal spending for value sectors to outperform. Reduced fiscal spending expectations probably removes the risk of a painful rotation out of Tech, but don’t give up on cyclical/value sectors yet.  Expect gradually higher bond yields and a resumed, but calmer, pro-cyclical/value trade to follow stimulus relief greater than $1T and/or encouraging vaccine data.