S&P 500 Weekly Forecast: Stocks focused on the battle for the Senate

 

• Biden has beaten Trump to become president, but what happens next for financial markets?
• Three key risks that hang in the balance for the foreseeable future. 

Democratic candidate Joe Biden has clinched Pennsylvania to put him over the threshold of 270 Electoral College votes needed to secure the US presidency, ending four days of nail-biting suspense for Wall Street.

However, the transition will be like no other in a contested election and there is plenty still at stake for US stocks into the final weeks of the year.

This is considering the surging new cases of the coronavirus and a US stimulus package that is still in doubt. 

For the week ahead, in particular, negotiations to authorize a second stimulus check are set to restart in Washington as the Senate returns on Monday to complete its session.

Senate Majority Leader Mitch McConnell has changed his focus from working on stimulus aid in 2021 to making it "job one" this week. 

For a quick recap, US stocks closed out a strong week on Friday whereby the Democratic party challenger, Joe Biden, edged closer to victory in the presidential election, while the monthly jobs report underscored the coronavirus risks that still face the US economy.

The S&P 500 SPX lost 1.01 points, or 0.03%, to 3,509.44. For the month, the index has risen around 7.6%, closing Friday near to 2.3% from its all-time high of 3,588.

Presuming a Biden victory but a Senate controlled by the Republicans, the three major indexes notched their biggest weekly percentage gains since April. 

Policy gridlock in Washington has eased worries a Biden administration might tighten regulations on US companies.   

Meanwhile, however, whether the positive sentiment can last much longer is dependent on a few big uncertainties that boil down to the health of not just its population, but the US economy itself. 

Firstly, we have an incumbent US President Donald Trump that is not conceding to Biden’s victory but instead is challenging the outcome and seeking legal redress which will haunt markets for the coming weeks.

Secondly, the coronavirus cases have been surging on Americal soil and there is still no stimulus for the nation.

While the US government's closely watched report showed that the unemployment dropped sharply to 6.9% last month from 7.7% in September, the job recovery still slowed as fiscal support waned and coronavirus cases surged. 

US Senate Majority Leader Mitch McConnell referred to the data and said that the economic statistics indicated Congress should enact a smaller coronavirus stimulus package that is highly targeted at the pandemic's effects.  

Thirdly, the control of the Senate likely won’t be decided until a January runoff in Georgia, even after Democrat Joe Biden won the White House on Saturday.

An incumbent US President that is not conceding

Normally, the transition from one American presidency to the next one is not a matter to which the markets pay particular attention to. It is more of a distraction than anything else. 

It is usually a simple matter of practicalities and technicalities, as teams of officials peacefully give over their powers.

However, this is, after all, 2020.

A Trump-Biden transition, of course, is going to be unlike what we have seen before. 

As we now know, Biden has claimed victory and is getting set for taking office on Inauguration Day on Wednesday, January 20. He has been working on this transition outline for months.

The Associated Press has been calling Pennsylvania and Nevada for Biden, so it brings the president-elect's tally to a convincing  290. 

The election in Georgia, where Biden has a small lead, is yet to be called. But, a win in Nevada will bring Biden's final tally to 306, which was Trump's tally in 2016. 

However, in the background, the market is having to deal with the noise of the incumbent president, Donald Trump, who has been decrying the process and is seeking legal redress.

‘’Democrat Joe Biden had won the race for the White House, Republican President Donald Trump and his allies made one thing clear- he does not plan to concede anytime soon. The president pledged on Saturday to go forward with a legal strategy that he hopes will overturn state results that gave Biden the win in Tuesday's vote. Trump aides and Republican allies, while somewhat conflicted on how to proceed, largely supported his strategy or remained silent,’’ Reuters wrote.

This will keep the markets nervous in the coming weeks as it will leave some uncertainty on the table and the possibility of the element of surprise around every new corner. 

We are already heading towards the holiday season, with Thanksgiving at the start of it, November 26. This is a period where market participants will already be less active having positioned for the New Year and less willing to take on risk. 

So, with the prospects of legal battles taking place, investors will need to decide whether they want to ride out the risks of a  discontented Trump and a band of his supporters throwing out legal threats and complaints.

The US president is setting about charging the media with conspiring to steal the election and calling the results a "coup."

Statements by Donald Trump:

“We all know why Joe Biden is rushing to falsely pose as the winner, and why his media allies are trying so hard to help him: they don’t want the truth to be exposed. The simple fact is this election is far from over. Joe Biden has not been certified as the winner of any states, let alone any of the highly contested states headed for mandatory recounts, or states where our campaign has valid and legitimate legal challenges that could determine the ultimate victor. In Pennsylvania, for example, our legal observers were not permitted meaningful access to watch the counting process. Legal votes decide who is president, not the news media."

"Beginning Monday, our campaign will start prosecuting our case in court to ensure election laws are fully upheld and the rightful winner is seated. The American People are entitled to an honest election: that means counting all legal ballots, and not counting any illegal ballots. This is the only way to ensure the public has full confidence in our election. It remains shocking that the Biden campaign refuses to agree with this basic principle and wants ballots counted even if they are fraudulent, manufactured, or cast by ineligible or deceased voters. Only a party engaged in wrongdoing would unlawfully keep observers out of the count room – and then fight in court to block their access.''

"So what is Biden hiding? I will not rest until the American People have the honest vote count they deserve and that Democracy demands."

Stimulus still in doubt

There are stark fundamental differences in the size and scope of more stimulus aid which makes a clash almost inevitable this week as the Senate returns on Monday to complete its session.

Moreover, distracted by his loss of the election, it isn't clear what role, if any, Trump will be contributing to shaping a bill designed to come to a vote before the presidential inauguration. 

The problem for investors is that no matter the outcome of the elections, the surging cases of COVID-19 are not going away.

When you have combined them with a lapse in the few remaining stimulus benefits left, the economy will be at a standstill with millions of Americans at risk.

Coronavirus cases have spiked to record numbers in recent days.

Around 10 million Americans thrown out of work during coronavirus lockdowns remain idled and federal relief programs have expired.   

However, we will likely see markets clinging to the hope that both Democratic and Republican lawmakers are in favour of a final package that includes new stimulus payments for individuals and families.

"That's Job 1," Senate Majority Leader Mitch McConnell said Wednesday, referring to fighting the coronavirus by funding programs in another stimulus bill. 

However, it isn't clear if the Kentucky Republican, who won reelection, supports a new stimulus check in the next bill.

The control of the Senate is next big focus

This particular post-election cliff-hanger is what investors will be monitoring very closely over the next few weeks because it will determine the balance of power in Washington.

So far, neither party appears to have a lock on a Senate majority.

The tally as its stands for the next Senate is 48 Republicans and 48 Democrats after Tuesday’s election. Two seats in Georgia are headed to runoffs on Jan. 5. And seats in North Carolina and Alaska are still too early to call.

Indeed, the stakes have not been higher for a momentous political struggle in Georgia during President Donald Trump’s final lame-duck days in office. 

The state is closely divided, with Democrats making gains on Republicans, fueled by a surge of new voters. But no Democrat has been elected senator in about 20 years. 

With a Democratic majority in the Senate, the party that also controls the House would have a firm grasp on power in Washington.  

In other words, Biden would have the ability to push major portions of his legislative agenda through Congress.

“Now we take Georgia, and then we change America,” Senate Democratic leader Chuck Schumer told a crowd celebrating Biden’s victory Saturday on the streets of Brooklyn.

However, if Democrats do not gain control, Senate Majority Leader Mitch McConnell, a Kentucky Republican, could have the ability to check Biden’s ambitions. 

The conclusion that markets have come to is that the GOP will retain the Senate which would dilute some of the political outcomes that were potentially anti-business.

The risk is that this presumption could have been too hasty.

Overall, much now will depend on how quickly the defeated president will accept the result of the election and by how certain the road ahead in US politics can be.

However, a divided US Congress with the Senate in Republican hands, for now at least, it can mean nothing but stalemate for US politics.

S&P 500 Technical Analysis

From a market structure perspective, there is room higher to meet all-time highs and a continuation beyond that would be expected to pull back to test the all-time highs as support. 

If there is no continuation higher, then the following analysis and observation could come into play. 

Weekly chart

The above illustrates the weekly structures that could be respected.

Daily chart

A 50% reversion could be on the cards from a daily perspective.

Meanwhile, at the trendline resistance, the price could struggle from here and revert back to test the Fibonacci retracements and major confluence at the 38.2% Fib.

4-hour chart

Observations

If the market can manage an extension to meet the all-time highs or exceed them slightly, it could bring about a nice confluence with 3,400 support as a 61.8% Fibonacci retracement of the bullish impulse.