Stocks rose steadily overnight ahead of election day, and held onto those gains during market hours, holding in a tight range near rally highs. Las Vegas Sands Corp (NYSE:LVS) extended recent gains by nearly 4% to top our go-to list, but overall the action was tepid. Apple Inc (Nasdaq:AAPL) was another trade intra-day traders highlighted in the morning as it opened up above the recent mini-downtrend, but like most of its fellow tech leaders it saw only modest follow-through as investors were hesitant to go risk-on ahead of election results.
The dollar opened down near recent lows, which mirrored the overnight rise in US equities. The two have developed a highly correlated inverse relationship in recent months, it will be interesting to see if we can get a de-coupling of that relationship over the next year (and which direction they would trade in tandem). While a depreciation of the greenback is part of the natural re-balancing of the world economy, aggressive money printing to achieve that objective could have long-run inflation implications, which doesn’t seem to worry the deflation-paranoid FOMC. Bill Gross, for one, stated his opinion that the dollar could see as much as 20% more downside.
For the past several trading days, the markets have shown indecision ahead of the two hyped events: mid-term elections, where Republicans are expected to wrest back control of at least the House, and the Fed announcement on QE 2.0, which most expect to come in light of previous fears, err, expectations. Despite slightly lower predictions for QE2, the market has yet to show any concern, and it will be interesting to see what the reaction is if the number comes in light. Recent economic data has actually shown signs of a hastening recovery by some metrics, as the ISM Manufacturing survey yesterday was the latest indicator to show more rapid expansion. The Fed has thus far been able to prop up asset prices through dovish language, and now it seems that may have been enough to get them through the most fragile stages of the recovery.
But that is not to say we are out of the woods, especially in regards to housing and the foreclosure crisis, which could stick banks with another round of massive losses. The revelations of widespread fraud in the mortgage market are deja vu for Americans who have grown skeptical of leaders and regulators who have proven themselves corrupt and/or inept in correcting the real problems at the heart of the financial crisis. Well, America will find its voice tonight when election results become official, and it was be interesting to note what the change in political climate will be with Republicans emboldened in their quest for complete obstruction of Obama administration policy goals. In terms of the market, history says gridlock will be, contrary to what media talking heads would lead you to believe, bad for the market, especially at a time when policy action and regulatory overhaul are so important in efforts to move this country forward. But hold on to your britches folks, because the real fireworks will come tomorrow on the heels of the two-day FOMC meeting. No matter what the outcome is, the reaction of the market is the real wild-card.
