The Market Changed Its Mind Three Times

One election result. A 3% rally, a 4.4% rout, a shrug. No new facts.

The Close

The S&P 500 finished the week at 7,376.86, up 0.3% on Friday. The Nasdaq composite rose 1.1% to 24,579.42. The Dow slipped 0.5% to 51,285.73. The Russell 2000 gained 0.9% to 2,754.11. Over the five sessions: the S&P 500 lost 2.7%, the Nasdaq 3.4%, the Dow 0.9%.

Those weekly figures are the flattest possible description of an extraordinary week. Inside that 2.7% sit a 3% Dow rally on Wednesday, the Nasdaq's worst day in nineteen months on Thursday, and a reversal of both on Friday. The news that produced all three was the same news.

One Big Thing

Take the three sessions in order, because the order is the whole story.

Wednesday. Democrats won both chambers of Congress. The market decided this meant divided government, a stalled legislative agenda and, through hopes of an end to the Iran conflict, much cheaper oil. Crude fell more than 8%. The Dow rose 3%, its best day following a midterm in forty-four years.

Thursday. The market looked at the identical result and saw something else entirely. Several of the newly elected had campaigned against data-centre construction in their states. If the artificial-intelligence buildout becomes slower and more expensive, the firms selling the shovels are worth less. The Philadelphia semiconductor index fell more than 12%. Nvidia dropped over 9%. The Nasdaq lost 5.5%, its worst day in nineteen months, and closed in correction, more than 10% below its October 6 record. Roughly $3 trillion came off the S&P 500's market value.

Friday. The Nasdaq rose 1.1% while the Dow fell 0.5%, inverting Wednesday almost exactly.

Between Wednesday's close and Thursday's open, not one vote was recounted. Nothing about the election changed. Only the reading of it did.

Jed Ellerbroek of Argent Capital Management called Thursday "the capitulation phase for the data center capex beneficiary stocks," and added that he thought "the magnitude of the moves is outsized." Chris Zaccarelli at Northlight Asset Management was blunter still, describing the market as having a "day-to-day knee jerk reaction to changing narratives."

That is not a market absorbing information. It is a market arguing with itself about legislation nobody has yet drafted.

The Chart That Explains It

Thursday alone erased more than the whole week's decline; the other four sessions were net positive. Wednesday's celebrated rally covered about a third of Thursday's fall. Net of everything, a holder gave back 2.7%. The violence was in the sessions, not in the information.

The Deeper Read

The oil trade is the cleanest proof, because it was tested inside twenty-four hours.

Wednesday's rally rested substantially on the notion that the election made peace in the Gulf likelier, and crude fell more than 8% on it. By Thursday, Brent had risen 3.9% to $98.29 and US crude 2.7% to $90.52, after at least five vessels reported attack incidents in the Gulf — incidents that had been under way since the Sunday before. The information already existed while the market was busily pricing its opposite. Nothing was learned. One guess was replaced by a different guess.

Now set that beside Friday, when something real did arrive. October payrolls came in at 165,000 against a forecast of 59,000. Unemployment fell to 4.1%. Wages rose 3.1% over the year. August and September were both revised upward. The implied odds of a December rate rise moved to 76.8%, with the funds rate already at 3.75% to 4%.

A measurable change in the economy, and in the likely path of interest rates, moved markets considerably less that day than a guess about data-centre permitting had moved them the morning before.

What This Means For You

Nothing in the paragraphs above required you to do anything, and that is the part worth keeping from the week.

A reader holding a broad American index fund gave back 2.7% and remains up 7.8% on the year. The Dow is up 6.7%, the Nasdaq 5.8%, the Russell 2000 11%. Anyone who sold into Thursday's rout bought back higher on Friday. Anyone who bought Wednesday's rally was 4.4% worse off within a day. Three reversals in three sessions is precisely the environment in which activity is expensive and patience is free.

One thing from the week does deserve a place in your thinking, and it is not the election. The Federal Reserve meets on December 8 and 9 with a rate rise now the market's base case, and Friday's jobs report is the reason. Rates staying higher for longer shapes what your bonds pay, what your cash earns and what borrowing costs. Committee hearings and permitting disputes do not, at least not on any timetable you can plan around.

— Anthony

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