“May you live in interesting times” is a well-known saying but uncertain in its origins. It’s thought to be a Chinese Curse, so says Wikipedia (1). Supposedly, it stems from a proverb, “better to be a dog in times of tranquility than a human in times of chaos.”
Tranquil dogs could be in short supply the next couple of days. First up, the Georgia Senate vote with the power of Congress at stake. Wall Street was enthusiastic at the prospect of a divided government following the Presidential election. According to the latest polls, the pair of Democrats are the favorites on the eve of the election.
Bye-Bye divided government if both Democrats win. The Senate will be 50/50 with Vice President Elect Kamala Harris the tie-breaking vote. It’s hard to imagine highly partisan policy passing on Harris’ vote during times of a great political divide, but you never know.
The day after the Georgia election, January 6th, Congressional certification of the Presidential election could be like rabid dogs in times of great upheaval. Although, despite what you might be hearing, it’s not unprecedented. Objections to the Electoral College votes also happened in 1969 and 2005 following the election of two Republicans, Richard Nixon and George W. Bush. (2) Much like the previous two, objections will likely be heard, eventually dismissed after huffing and puffing with Joe Biden sworn in as the next President.
All of this political chaos creates uncertainty, and you know the worn-out cliché’, the market hates uncertainty. That was on full display during the first trading day of 2021. Wall Street hammered prices to kick off the year of the “White Cow”, according to the Chinese Calendar.
January is also a decent barometer for the rest of the year, also known as the January Effect. Essentially, as January goes, so goes the rest of the year. Like most market axioms, it’s not perfect but is predictive about 60% of the time. (3)
Based on Monday’s action, bears have a January head start on bulls and if the action we see on the index charts, plus political chaos in the days ahead, the gap could grow even wider. The NASDAQ closed below its rising trendline, which can be the beginnings of a reversal.
If the indexes trade under Monday’s lows (DOW: 29,881.82, S&P 500 3,662.71, NASDAQ 12,543.24) then more downside is highly likely. Selling would likely continue until the NASDAQ his its 52-week moving average in the neighborhood of 12,100. That’s a decent sized slide, but a number of support lines cross paths there.
In our view, investors need to be cautious in the days ahead, uncertainty abounds. Fortunately, when the politics are over, earnings season will begin, giving investors a greater sense of certainty.
Wall Street did take a more cautious stance last week with defensive sectors like Utilities, Consumer Discretionary, Real Estate, Healthcare, Metals and Mining stocks moving to the front of the performance leaderboard. Those sectors tend to hold their value better when times become interesting for the wrong reasons.
Of course, with stocks banging lower early and the possibility of more selling to come, we’ll stay away from adding anything new. We might consider adding Utilities Select Sector SPDR Fund (XLU) if it falls to $60.00.
Again, with stocks possibly headed lower, why buy something today that could be cheaper tomorrow? After reviewing XLU’s holdings, Pinnacle West Capital Corporation (PNW) has the best mix of some of the metrics we look for in interest rate sensitive companies; lower debt compared to peers, higher rates of return on assets, lower price to cash flow and on the lower end of the price to book spectrum.
However, just like our position on XLU, investors looking to add utility stocks to their portfolios might wait for PNW to shave off a little more; $77ish might be a good place as there is decent support and its close to the 200-day moving average of $76.95.
1 – https://en.wikipedia.org/wiki/May_you_live_in_interesting_times
2 – https://history.house.gov/Institution/Electoral-College/Electoral-College/
3 – https://www.investopedia.com/terms/j/januaryeffect.asp