US election a big negative for stocks

Editorial | Mary Ma 7 Sep 2020

The mini-crash that greeted US technology stocks last week may have surprised some in light of better-than-expected economic data, including a sustained drop in the unemployment rate and fewer applications for jobless benefit claims.

But the crash - or correction - was not totally out of the blue.

As Nasdaq skyrocketed from a pandemic dip to all-time highs over just a few months, investors knew there was bound to be corrections of some kind.

Knowing a correction was imminent - but not when - the party continued with bets on tech stocks. After leading the spike, Apple and Tesla suddenly reversed to lead the crash.

The party may have lasted a little longer if US President Donald Trump had not tweeted to say the Dow Jones Industrial Average had risen past 29,000 and that the market would have crashed if Joe Biden were president.

Trump's tweet helped to reveal two basics. First, with even conventional stocks on the Dow Jones having nearly recovered from the pandemic, it means that Wall Street stocks are just too expensive and disconnected from the global recession people are experiencing. Second, with Biden, the market would crash. So, will Biden be elected in November?

In tweeting, Trump was not aware that he also awoke investors to the fact of an expensive Wall Street detached from the pandemic drag as well as the possibility of a Biden administration following the election.

The rally, according to the Financial Times, was fueled by SoftBank's massive gamble on tech stocks. The newspaper even named SoftBank the "Nasdaq whale."

The tech crash started with Tesla, a vulnerable building block in the castle. After its biggest independent investor - an Edinburgh-based investment fund - pulled the block by cutting its stakes in Tesla to reap huge profits accumulated as the company ascended like its SpaceX rocket, the base of the castle was weakened to set off a domino effect.

SoftBank would have suffer badly - unless it managed to close its long positions in time.

When a market heats up, it rises regardless of bad news if there is a whale splashing underneath. By the same token, when a market cools, it falls despite good economic data once the whale is wounded.

A pressing question is whether or not Biden will be elected. So, will he?

Democrats are nifty poll masters. The results of a recent poll by their friendly broadcaster CNN that Biden's lead had been narrower than expected helped generate a sense of urgency among supporters and non-Democratic voters opposed to Trump. It's more likely than not that markets will come under pressure between now and a definite election outcome.

Hong Kong stocks could be affected, too, as the SAR moves to enrich the Hang Seng Index with technology constituents. With the Nasdaq trying hard to regain balance, it would be unrealistic to expect a clear sky for Hong Kong stocks.

Vaccines may be the solution to the pandemic uncertainty, but when they become truly available, will traditional Hong Kong stocks like banking and real estate stand to benefit more?

It's probable. After all, they have fallen behind their tech counterparts during the pandemic bubble.

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