ED HARRISON: It's Thursday, November the 5th, 2020. This is the Real Vision Daily Briefing. I'm Ed Harris, and joined shortly by Jay Pelosky of TPWIM. But first, with the news of the day, Haley Draznin.
HALEY DRAZNIN: Well, Ed, you said it best this morning. Everything on my screen is green-- shares, gold, silver, commodities, Bitcoin. Today is the return of the Everything Rally. We know investors do not like uncertainty, but as we continue to wait for the outcome of the US election, markets have rallied-- a lot. The S&P 500 is on track to extend its sharpest rally in a week since April, with tech stocks leading this at the vanguard, NASDAQ surging.
While Treasuries rode the wave yesterday in an odd move, defying risk parity, today, they hit the brakes with a mild sell-off. Bitcoin, we're, seeing is soaring. The VIX is down a bit. Investors are appearing to coalesce around the idea of a divided government. Markets have been rallying as Joe Biden and a Republican-led Senate gains swing state votes-- what only a few days ago was considered a disaster outcome. History has shown us that since World War II, stocks had the highest gains when there was a Democratic president and a split Congress.
With a divided government, Biden would have difficulty passing legislation aimed at regulating tech companies and, also, raising corporate taxes. Senate Majority Leader Mitch McConnell has said Congress will pass a stimulus package by the end of the year. It's looking like it will be around $1 trillion, smaller than the larger package both the Trump administration and Democrats proposed, but the chances of a deal seem to be rising. And with a divided government, it was considered a doomsday scenario.
The race could still change, however, and the economic backdrop remains murky amid the coronavirus pandemic. We're seeing a K-shaped recovery continue to form. This gridlock might be good for markets and investors, but a lot of pain remains for small business owners and the unemployed.
It's a pessimistic outlook for jobs. When we look at the new initial jobless claim numbers that came out today, they remain stubbornly high-- 751,000 jobless claims were filed last week. The jobless claims number was revised the week prior at 758,000. This is on top of data released Wednesday from ADP, which showed companies in the US added fewer jobs in October. It makes it seem that net job growth has downshifted materially. The Labor Department jobs report comes out Friday-- tomorrow-- and it is expected to show more loss in momentum for job growth.
Let's note, this is all before any impact of a fall/winder COVID wave can be felt in the numbers. The future of the economy depends on these key questions-- what happens with the virus and stimulus, how quickly Americans start spending again when it comes to travel, restaurants, and entertainment, and whether the contested election will spark social unrest.
On that note, back to you, Ed.
ED HARRISON: Thanks, Haley. So Jay, you're looking good today, I must say. I'll have to give you some kudos on a nice red and white outfit. I'm going with the red, white, and blue, by the way.
JAY PELOSKY: OK, well, Ed, I recall from the last time we were together, I think in September, you razzed me a little bit about my lack of color. So I picked this one out especially for you.
ED HARRISON: Excellent. I'm very happy about it.
JAY PELOSKY: I'm waving the red flag here, so I'm glad you appreciate it.
ED HARRISON: Well, the last time that we spoke, you said some very prescient things with regard to the fact that you had been fairly bullish, but you said you wanted to take some money off the table. And that was probably the right call given what we saw at the beginning of September, and then, actually, again at the end of October.
But I want you to sort of tell me how you're thinking about things go back to the conversation you had here on the Real Vision Daily Briefing with Ash, and then our conversation, and then we can go move forward from there.
JAY PELOSKY: Well, I think that's a great idea, Ed, because we have had a number of conversations over the last couple of months. I think our conversation with Ash was back in early June, and we had just made a call saying that we were in a new bull market. We made that call on our May monthly. And we basically argued that policy support, liquidity, and the speed of science-- and, hopefully, rapid testing and a vaccine-- was putting us into a new bull market, and investors needed to catch up with COVID speed, and discount things appropriately, and get ahead of how things were moving.
So that was in early June with Ash. And then we got together again, you and I, in September, early September-- so now two months ago. And at that point, we had just written a monthly titled, "The higher you go, the tougher it gets." And we had just hit new all-time highs on the S&P. And we said, hey, look we're a little extended. The pullback here would be healthy. A correction should be bought for medium to long-term investors, but we've gone to new all-time highs, we're a little bit ahead of ourselves, and so let's be a little careful here.
We also, at that time, introduced the big three issues which we spent the last couple of months focusing on-- the first, US elections, the second, US stimulus, and the third, a vaccine. So that has really been-- since September, those have been the things that we have really been paying attention to. And then, the other thing we did in that conversation, as you may recall, Ed, is we talked about our COVID investing formula, right? Which was that the countries that were able to control the virus had the best opportunity to fully reopen their economies, therefore had the best chance of having a robust, broad stock market advance, and therefore would outperform. And that's where we suggested investors should be. And that, obviously, centered around Asia.
So looking back, I just ran the numbers in preparation for our conversation today, and over the last three months, Asia has been the best-performing region in the world. China, East Asia, as well as Japan-- Japan, which no one ever talks about, nobody likes, is up 9% over the last three months, outperforming the S&P, outperforming Hackley, A outperforming the emerging markets. So that COVID investing formula has really worked well for us, and we continue to like Asia.
So now, today, where are we? We've been focused, our latest monthly-- you always catch me very nicely right after the monthly, so I'm all fizzy with ideas and ready to discuss. So kudos to you and your booking team. But the title of our monthly was, "Clarity coming, are you ready?" And basically, arguing that that time frame to get clarity on those big three issues of election, stimulus, and vaccine was imminent. It's right in front of us.
And so last week, our weekly-- you know we write weekly musings-- the title there was "Peak uncertainty?" with a question. Because I had just been on Bloomberg with John Farrow and his show, In the Open, last Thursday, a week ago today. And so we were just discussing last Wednesday's action, where the S&P fell 3%. And I was saying to John, I think that was the point of maximum uncertainty.
And you had the European lockdowns. Everybody was freaking out about that. European equities were trading back to where they were in May, in the spring. European financials had been crushed. The US was down 3% on the day. Nobody really knew what was going to happen with the elections. Stimulus was dead. And so I was making the point then that you want to be buying into that.
We are at that point of maximum uncertainty, and when you are at maximum uncertainty, you know how the business works. You need to be a buyer. If you have conviction on a forward view, then we are, and have had, strong conviction that we're in the new bull market, that we are getting clarity on the elections, the stimulus, and the vaccine, that those things will stimulate a rotation trade out of the growth into value, out of the US into the rest of the world, and we'll start a bear market in long-duration sovereign debt, and it is very bullish for commodities.
And so the areas that we've been adding to in the last week or so-- and I'm giving you of the whole spiel, and then we can pick it apart-- but over the last couple weeks, we've been adding to two areas. One, deep cyclicals. It's been very interesting to me that things like airlines, hotels, cruise lines have stopped going down relative to the S&P. And we know that when things are flat on bad news, the next step is for them to go up on any kind of good news.
And so I just used the airlines because we own JETS, the airline ETF. As an example, you've had cases in the United States double over the last month, yes JETS are up. So I mean, that tells me that they're not going to go down. And if you get stimulus, and if you get a vaccine, they're going to trade sharply higher.
And the second thing that's going to trade sharply higher is oil. So the other thing that's really been bombed out, is pretty widely hated, is crude oil, right? Everyone wants to talk about climate, sustainability, green energy, and we like green energy. We like clean energy. We own some of that as well. But what's really mispriced-- so the risk-reward here, given that we're a point or two away from all-time highs in the S&P again, risk-reward, what's really appealing is the stuff that has very little risk-- and is demonstrating that like the airlines, like oil-- and has lots of upside reward.
If we're correct in our view that 2021 is going to be a global economic boom, a boom year for the global economy, and if that's correct, there is no way that Brent is going to trade at $38, $37 like it was a couple of days ago. It will be trading in the high 50s, the low 60s. So those are the areas of opportunity where we're actually-- have been adding to in the past week or two-- things like deep cyclical airlines and oil.
ED HARRISON: Very interesting. And I want to go into the three parts that you were talking about-- the election, I want to talk to you about stimulus, and I want to talk about the vaccine. Maybe we can go in that order, because I think that's what's on people's minds. In terms of the election, if we talk about clarity or lack thereof, it does seem like we have a little bit more clarity now in terms of the election, although I might say the Senate is relatively unclear.
But it seems that we're getting more clarity with regard to what's going to happen, except for the court cases with regard to the presidency, faster than some people had assumed. Well, how are you looking at the election, and how does that affect your positioning?
JAY PELOSKY: Well. Ed, one of the old outages in the investment business is it's better to be lucky than smart, right? So my view was that we were going to have a blue wave, and markets were going to do very well with that, particularly risk assets and equities, anticipating a large stimulus, and bonds were going to sell off aggressively worried about the same stimulus.
And so that, obviously, has not come to pass. But we were in are fully invested in the equities, and pretty much max overweight equities at this point. And so that's been great, right?
We went into this because of what we just touched on-- the lockdowns in Europe, the lack of stimulus in the United States. We went into the election at the most oversold condition in over 100 years. You have to go back to the election of 1944 to find a similar stage when the market was as oversold going into the election. So the reaction of the last couple of days was predicated and built upon that sell-off that we had in the prior week, like we just talked about.
A week ago, the S&P was down 3%. Now, today, it's up 3%. All right, so we have a little bit more clarity. I do think the presidency is going to be called very shortly. One of the important things you touched on, court cases, our view is that because of all the litigation that was done pre-election, there was actually very little to litigate post-election absent the Pennsylvania situation which is already in front of the courts, the absentee ballot case which is already in front of, I believe, the Supreme Court.
So if it boils down to Pennsylvania, and if it boils down to absentee ballots in Pennsylvania, then, maybe, we will have that dreaded scenario of things going all the way to the Supreme Court. Absent that, it's all been litigated about what's an acceptable ballot, how long will the votes go for, how long will they be counted. Notwithstanding what the president has said, all that stuff has already been determined. And we've seen that as we've gone through the last couple of days. Vote counting continues, and a steady process.
So I think investors have taken comfort from that. And, obviously, investors have taken comfort from the idea of a Biden presidency and a Republican Senate, which looks like that may be the way we end up. Or, as you and I touched on, there's still the potential of runoff races in Georgia that may not really actually settle the Senate until January. So that's an open question, but I think it's quite clear that investors are OK with the trade of slightly less stimulus, because it's not a blue wave, in return for less likelihood of big tax increases, which people were worried a Biden administration, with the Democratic Senate, would force through.
ED HARRISON: So let me interrupt you there for a second, because I think there are two potential things that people are thinking about that you touched upon. One is what I would call a chaos positioning that's being unwound. Because you talk about the maximum oversold, I mean, that's a discrete outcome. People were buying out of the money puts and things of that nature. And they were also buying calls on the VIX and things of that nature as well.
And then there's the whole thing about divided government being positive. Those are two different narratives. And I think that over the coming week, we're going to find out which one has legs. Or maybe they both have legs.
I mean, when you look at those two, which one do you feel, actually, is much more representative of the price action that we're seeing, both in stocks and in bonds?
JAY PELOSKY: I think it's that the latter, the split government. Because you had, obviously, the bond market, the Treasury market unwound. That blue wave, I think the 10-year got as high as 95 bps overnight and then unwound that all the way back to 75, 76 in the space of one trading day. So I think that clearly demonstrates the taking out of the blue wave massive stimulus position.
I think people have likewise unwound all the chaos positioning, as represented by the fact that the S&P is up 6% since last Wednesday in a week. So that's a pretty robust performance. So to me-- and I think all that's appropriate. I think we have gotten through the election. The market has taken very calmly the fact that there isn't a result a day or two days later.
I think that's great. There's been a lot of maturity demonstrated, I think, by investors on that front, as well as by voters and citizens in general. All the fear of rioting-- I'm in the middle of Manhattan, and last week, people were boarding up their buildings, which I thought was just ridiculous. But yet, they did it because of all of the worries about what had happened in the summer. Which, even then, 90% of the boarding up happened after the-- of looting in New York City. I was here for all of that, so I have a very personal firsthand witness account of that.
So to me, markets have reestablished positioning. We're getting clarity. Clarity allows risk assets to rise. I think it brings pressure onto the bond market. The reason why bonds didn't go back and break through the resistance level of 73 basis points-- somewhere around 73, 74 basis points-- was because of the likelihood of stimulus. And once you get a vaccine, we go off to the races. We'll get to that, I'm sure.
So for me, I think positioning has now stabilized. Markets have taken on board a Biden presidency with a Republican Senate. And even if it turns out that the Democrats have one more Senator than the Republicans, there's not going to be the flexibility of a four-seat advantage that people were talking about the day or two prior to the election.
ED HARRISON: So that brings up the stimulus question, then, because that's the second part that you're talking about. There are two possibilities. One is stimulus before January 20. The second is after. And Mitch McConnell has said that he has some degree of latitude to reach a deal-- but a skinny deal. Is there going to be a skinny deal before or after January 20?
JAY PELOSKY: [LAUGHS] The amount of paper, the amount of trees killed talking about skinny deal, big deal, pre, post, it's just off the charts, right? I mean, to me, it doesn't really matter. More important is there will be stimulus. It's a question of when, not if. And that's what investors really care.
I think we've had a blessing from the IMF itself saying that fiscal policy must be an important part, policy part, of a global economic recovery. So the orthodoxy of the IMF, which has always been about austerity, is now firmly in the camp of fiscal spending. So fiscal spending in the US is a when, not if question.
ED HARRISON: But but they way, when you say "when," I mean, it could be could-- could it be too late? Could that wind come after it's needed?
JAY PELOSKY: Yeah, I was just about to say that. The human component of it-- the human suffering, the human need-- is there and has been there. And so that's an important consideration, that we should have a deal. And it would be great if we got a deal in the lame duck session. That would be both politically wise and policy wise.
Whether that happens, I really have no idea. Whether, if it comes a month later, that will still be fine for the market. But what it does do, Ed, is it slips the positioning of whether we're going to know about a vaccine first or stimulus first, right? And I think that's the subtle point which most folks have been cottoned onto yet. We're likely to know about a vaccine before we know about a stimulus. And a vaccine is even more powerful for what it will do for portfolios.
And I've talked about how the portfolio that led us