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Red, Blue or Both? Still A Bullish Scenario For Stocks

Summary:
As I write this, former vice president Joe Biden has not yet been named president-elect, but with him leading in the crucial battleground states of Pennsylvania and Georgia, it looks more and more likely that he will be sworn in this January. The market seems to have predicted this outcome. If the S&P 500 is up between July 31 and October 31 before an election, it has historically favored the incumbent party. And if it’s down, it has favored the challenger. Following a loss of 5.6% last week, the S&P was underwater about 4 basis points from the end of July. Many of you reading this are no doubt disappointed. In a poll I ran back in August, 76% of you said you believed President Donald Trump would be better for the stock market than Biden. I’m here to tell you there’s probably no need for

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As I write this, former vice president Joe Biden has not yet been named president-elect, but with him leading in the crucial battleground states of Pennsylvania and Georgia, it looks more and more likely that he will be sworn in this January.

The market seems to have predicted this outcome. If the S&P 500 is up between July 31 and October 31 before an election, it has historically favored the incumbent party. And if it’s down, it has favored the challenger. Following a loss of 5.6% last week, the S&P was underwater about 4 basis points from the end of July.

Many of you reading this are no doubt disappointed. In a poll I ran back in August, 76% of you said you believed President Donald Trump would be better for the stock market than Biden.

I’m here to tell you there’s probably no need for handwringing at this point, especially since projections of a “blue wave” did not materialize. The Democrats were not able to flip the Senate, managing only to keep control of the House.

Investors were strongly in favor of this development, with the S&P ending the week up 7.3%. This is a very good sign for stocks for the rest of the month and year. According to my good friend Pimm Fox, “the direction of the S&P 500 did not change from the period beginning the day after the election for the remainder of November, nor for the rest of the year.” 

If history is any indication, a Biden presidency and divided Congress may very well end up being the most favorable outcome for equities. With Republicans controlling the Senate, we’re less likely to see hugely consequential legislation passed such as massive tax hikes, drug pricing limits, nationalized health care and spending for the Green New Deal. Both chambers will need to compromise to pass another stimulus package. Other policy may continue to be made mostly by presidential executive order, which can easily be rolled back by the next president.

Businesses love Congressional gridlock for this very reason. Tech stocks had been trending down for days before the election as they faced antitrust scrutiny, but now that it appears certain Congress will remain divided, they’ve recovered most of their losses. The tech-heavy Nasdaq 100 jumped close to 10% for the week.

Focus on the Policies, Not Necessarily the Parties

Below is a chart I shared with you two years ago, after the 2018 midterm elections. Looking all the way back to 1928, average annual stock returns were highest (16%) when there was a Democratic president and split Congress, according to Bank of America (BofA). One caveat: This particular setup has a very small sample size, seen only in the last four years of President Barack Obama’s eight-year administration.

Red, Blue or Both? Still A Bullish Scenario For Stocks

The largest sample size is when there was a Democratic president and Democratic Congress, seen in 34 out of 89 years. During those years, average returns were a still attractive 14%.

The reason I point that last part out is because you may be wondering about the ramifications should Democrats take full control of Congress in 2022. By my count, 22 Republican senators will face reelection that year, giving Democrats an opportunity to flip the upper chamber.
 
As I frequently say, it’s not the party that matters, but the policies. We believe government policy is a precursor to change, and that money can be made in America no matter who’s in charge. Case in point: Stocks recovered nicely in Obama’s first term following the housing market crash, despite there being a legislature controlled by Democrats. Health care stocks, in particular, were big winners between January 2009 and January 2013, rallying more than 80%.

Red, Blue or Both? Still A Bullish Scenario For Stocks

Time to Hedge for Hyperinflation? Gold Above $1,950, Bitcoin at $16,000

At the same time, I don’t want to minimize the inflation risk if Biden is able to get more extreme left-wing legislation passed. Modern monetary theory (MMT) is a real threat I’ve written about before, most recently last week, when it was reported that Massachusetts senator Elizabeth Warren may be interested in a Cabinet position as Treasury secretary. Vermont senator Bernie Sanders, a self-proclaimed “Democratic Socialist,” may also end up with a role in Biden’s Cabinet, as Labor secretary.

Among the inflation hedges CLSA analysts highlighted this week are gold and bitcoin. Indeed, this week has been highly constructive for both assets, with gold advancing nearly 4% to trade above $1,950 an ounce. Bitcoin was trading above $16,000 today for the first time since January 2018.

Holdings in gold-backed ETFs have had an incredible run this year as investors seek a safe haven. Such products saw their 11th straight month of positive inflows in October, bringing total global holdings to over 110.8 million ounces, according to Bloomberg data.

Red, Blue or Both? Still A Bullish Scenario For Stocks

Thanks to higher metal prices and investor interest, gold mining equities have lately been cash flow machines. Gold royalty companies, including Franco-Nevada and Royal Gold, reported record revenues in the third quarter. Franco reported close to $280 million in revenues, up 43% quarter-over-quarter (qoq) and approximately 19% year-over-year (yoy). Royal Gold reported $147 million, up 22% qoq and 27% yoy.

I have high expectations for Wheaton Precious Metals, which is scheduled to report this Monday.

Red, Blue or Both? Still A Bullish Scenario For Stocks

Buffett’s Midas Touch Is Back

Another company that had a blowout quarter was senior producer Barrick Gold. The company reported record free cash flow of more than $1.3 billion. On a per-share basis, free cash flow growth was up 155% from both the previous quarter and the same time last year. Shares of Barrick closed up nearly 7% yesterday on the news.

If you recall, Warren Buffett bought shares of Barrick in the second quarter, after he bashed gold for years because it doesn’t pay a dividend. (And yet neither does Berkshire Hathaway.) Perhaps Buffett’s Midas touch is back?

Kirkland Lake also released stellar financial data on higher gold prices. Free cash flow came in at 273%, with per-share growth up an incredible 200% yoy and 15% qoq.

321gold.com founder Bob Moriarty and I discussed both companies in greater detail during our webcast this week. In case you missed it, you can watch the replay by clicking here. I know you’ll love the slides!

Biden’s $400 Billion Manufacturing Plan

Under President Trump, the manufacturing sector has been very strong, even post-COVID. Last month, the U.S. purchasing manager’s index (PMI) came in at 53.3, which is on the higher end of countries ranked by PMI.

Red, Blue or Both? Still A Bullish Scenario For Stocks

I don’t anticipate this changing or weakening under a President Biden. In July, the former vice president unveiled a four-year, $400 billion package to spur manufacturing and $300 billion for research and development. The goal is that the plan would create as many as 5 million jobs, many of them to replace those lost due to the pandemic.

Passing such a package may be difficult with Republicans in charge of the Senate, but should it become law, I expect demand for commodities and raw materials to benefit.

Register for the Virtual Junior Mining Expo, Featuring My Top 10 Companies

Speaking of commodities… Make sure you’re registered to join us next week on Thursday, November 12, for the first-ever Virtual Junior Mining Expo. To get the full details, watch the video below, then register for FREE by clicking here.

Gold Market

This week spot gold closed at $1,951.35, up $72.54 per ounce, or 3.86%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 10.62 percent. The S&P/TSX Venture Index came in up 8.56 percent. The U.S. Trade-Weighted Dollar fell 1.84%.

Date Event Survey Actual Prior
Nov-1 Caixin China PMI Mfg 52.8 53.6 53.0
Nov-2 ISM Manufacturing 56.0 59.3 55.4
Nov-3 Durable Goods Orders 1.9% 1.9% 1.9%
Nov-4 ADP Employment Change 643k 365k 753k
Nov-5 Initial Jobless Claims 735k 751k 758k
Nov-5 FOMC Rate Decision (Upper Bound) 0.25% 0.25% 0.25%
Nov-6 Change in Nonfarm Payrolls 580k 638k 672k
Nov-10 Germany ZEW Survey Expectations 41.9 56.1
Nov-10 Germany ZEW Survey Current Situation -65.0 -59.5
Nov-12 Germany CPI YoY -0.2% -0.2%
Nov-12 Initial Jobless Claims 725k 751k
Nov-12 CPI YoY 1.3% 1.4%
Nov-13 PPI Final Demand YoY 0.4% 0.4%

Strengths

  • The best performing precious metal for the week was palladium, up 12.64%, despite hedge funds cutting their positioning to a 10-week low. Gold had its best weekly gain since July as Joe Biden moves closer to winning the presidential election and on prospects for further Federal Reserve stimulus. The yellow metal hit a six-week high, also boosted by the declining U.S. dollar. Velocity Trade Capital analyst Michael Siperco wrote this week that the election outcome won’t change gold’s bullish trend as the longer-term macro outlook is already well established to support the metal.

Red, Blue or Both? Still A Bullish Scenario For Stocks

  • Barrick Gold reported its highest quarterly revenue since its 2019 merger with Randgold on stronger bullion prices. The second-largest gold producer announced $3.54 billion in revenue for the quarter ended September 30. Barrick raised its dividend by 12.5% to 9 cents a share.
  • AngloGold Ashanti also doubled its dividend payout ratio due to surging gold prices. Bloomberg notes the world’s third-largest gold producer will now return 20% of free cash flow before growth capital to shareholders. In the September quarter, AngloGold’s free cash flow rose nearly fourfold to $339 million.

Weaknesses

  • The worst performing precious metal for the week was gold, but still up 3.86%. Anglo American Platinum lowered its refined output and sales guidance after shutting its second smelting plan due to water leaks, reports Bloomberg. The company said the shutdown will cut earnings before interest, taxes, depreciation, and amortization by $380 million.
  • Kinross Gold reported revenue for the third quarter of $1.13 billion, below the average estimate of $1.17 billion. Revenue was still up 29% year-over-year. Gold production was down slightly year-over-year to 603,312 ounces.
  • The President of Ghana is asking for a second parliamentary review of the country’s proposed gold royalty fund after an initial probe raised concerns, reports Bloomberg. The $500 million IPO was suspended last month after calls by opposition groups who criticized the lack of transparency in the fund.

Opportunities

  • VTB Bank PJSC, Russia’s second-biggest lender and top gold buyer, is betting on precious metals to boost profits. The bank is prioritizing physical gold trading and lending to mining companies as they are one of the few sectors to benefit from the pandemic, said First Deputy Chairman Yuri Soloview in an interview. Bloomberg reports that the bank said it plans to start the first Russian ETF backed by bullion.
  • The Reserve Bank of India said in a report that it is considering diversifying the pool of assets it invests its foreign reserves in, and may increase purchases of gold and dollars, according to Reuters. The report also noted that the bank has already gradually increased gold investments.
  • Rich Ross, CMT of Evercore ISI, noted that “We are living in a material world without inflation, which is genius!” Buy compelling breakouts in gold and silver fueled be the weaker dollar and the inevitability of more stimulus.

Threats

  • The Veladero gold operation in Argentina is selling only enough bullion to keep the mine running due to currency restrictions, said Barrick Gold CEO Mark Bristow on the third-quarter conference call. “Due to the ongoing financial crisis in Argentina, the government has maintained currency restrictions and the forced repatriation of export sales into pesos.” Veladero has had a difficult time due to the nationwide quarantine and winter weather has delayed two projects.
  • Dan Barclay, head of Bank of Montreal capital-markets division, which is the mining industry’s top dealmaker, said that few deals will get done without greater clarity on the economy and pandemic. “There’s lots of conversations going on, lots of people exploring new ways to think and new ways to operate. The probability of a lot of action is going to be conditional on that economic recovery.” According to Bloomberg data, mining companies have been involved in $52 billion worth of acquisitions in 2020, which is less than half the value of deals seen during industry consolidation in the mid-2000s.
  • Southwest Airlines warns workers of first layoffs in company history as just a slice of the estimated 174 million jobs that are expected to be lost by the World Travel & Tourism Council this year due to COVID-19 travel restrictions. With new virus cases exceeding 100,000 per day now in the U.S. it will become increasingly difficult to navigate a clear path to recovery.

 

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 6.87 percent. The S&P 500 Stock Index rose 7.42 percent, while the Nasdaq Composite climbed 9.01 percent. The Russell 2000 small capitalization index gained 6.94 percent this week.
  • The Hang Seng Composite gained 6.96 percent this week; while Taiwan was up 3.40 percent and the KOSPI rose 6.59 percent.
  • The 10-year Treasury bond yield fell 5 basis points to 0.823 percent.

To read the remainder of the article go to www.usfunds.com/investor-library/investor-alert/red-blue-or-both-still-a-bullish-scenario-for-stocks

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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