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November 7th Daily Note

Summary

Markets rallied after midterm elections went as planned.

Cannabis stocks explode with the resignation of Attorney General Jeff Sessions.

With Democrats controlling the House of Representatives, the future of Chinese trade is now in question.

Equities opened up higher this morning as Wall Street welcomed a divided congress. Democrats took control of the House while Republicans held onto their majority in the Senate. Investors are seemingly taking comfort in a possible gridlock on capitol hill, not worrying about a reversal of tax cuts resulting from a democratic sweep, or further fiscal stimulus by an unchecked republican legislature.

The S&P 500 closed up 1.95%, technically breaking through the decline channel and returning to the 200-day average. Nasdaq rose by 2.64% as investors began to rotate out of defensive stocks back to tech and growth. Amazon and Netflix were up over 5%, Google, Apple, and Microsoft were up over 3%, and Twitter and Facebook were up over 1%. The Dow Jones rose by 2.13%, lead by industrials CAT and Boeing, up 4.44% and 1.46% respectively.

Chinese stocks also rose on the market wide rally. Alibaba rose by 3.43%, IQiyi and Momo were up over 2%, and Baidu and JD were up over 1%. IQiyi, although up 2.19% on the day, failed to break out of the decline channel. Technically, the previous high at $22.80 will be the confirmation breakout for iQiyi. Nio, the recent Chinese electric vehicle maker IPO, rose by 5.31% to $6.74 today, still in its consolidation range.

In finance, Citi lead the way up 2.31%. JP Morgan and Bank of America were up over 1%, and Wells Fargo was the laggard up only 0.05%. Square reported a beat on analyst EPS expectations by 2 cents. The payment processor was up almost 7% on the day to $82.69, but fell to a low of $76.25 after hours.

Semiconductors were not left out of the rally, lead by Advanced Micro Devices, up 5.61%. Intel and Micron were up almost 3%, while the laggard Nvidia was up only 1.29%.

Healthcare and pharmaceuticals were encouraged by the midterm results. Nektar Therapeutics rose by 5.18%, BIIB rose by 3.51%, ABBV rose by 3.94%, and LLY rose by 3.61%. XLV, the healthcare ETF was up 2.94% on the day.

The focus now shifts to the ongoing trade war between the U.S and China. Overnight, the MSCI Asia Pacific Index gained 0.2 percent while the Chinese Yuan weakened against the dollar. The 10-year Treasury yield dropped to 3.184% as democrats will likely stand in the way of further tax cuts. All eyes are on the G20 summit later this month where president Trump and president Xi are set to meet and discuss a possible deal regarding the trade war.

There hasn’t been much discussion regarding the impact of a democratic controlled house on the trade relations between the United States and China. There is no doubt that a divided congress will shake things up in the United States -- but don’t expect trade policy to be one of those items. Historically, democrats have favored a tougher stance against China on many different fronts, with trade being one of them. If talks don’t go well between the two presidents later this month, investors should not expect democrats to stand in the way of another round of tariffs imposed on China. As unlikely a democratic intervention against President Trump may be, the chief executive has the power to move forward with his trade agenda regardless of congress approval.

US Attorney General Jeff Sessions resigned following Trump’s request and half-year-long media accusations. Sessions has worked for to help reduce crime rates and strengthen law and order at the southern border. Sessions’s “zero acceptance” policy drastically reduced immigration rates from Mexico and South America.

Earlier this year, Sessions oversaw Mueller’s probe against Trump and Russia. Since then, Trump has repeatedly criticized Sessions, a major force leading to his prescribed resignation. The probe is now in question with the ousting of Sessions.

Tilray, Canopy Growth, and Aurora as well as other cannabis companies rallied after news broke that US Attorney General Jeff Sessions had resigned. Sessions took a tough stance on the legalisation of Marijuana, working toward revoking policies that allowed states to make their own decisions regarding the plant without interference from the federal government.

Tilray gained 30 percent, Canopy Growth gained 8 percent, and Aurora gained just under 10 percent. This was the second delivery of good news for the industry, the first being the decision for Michigan to legalize cannabis for recreational use after the midterm elections tuesday night. This increases the number to 9 for states that have legalized recreational marijuana, while 31 states allow for its medical use. Newly elected Illinois Governor J.B. Pritzker stated his first goal is to legalize recreational marijuana.

While cannabis remains illegal at the federal level, marijuana that is sold in a state is required to be grown in that state. That may change soon as more states vote to legalize its use, creating more opportunities for all cannabis companies.

Disclosure: I am/we are long MU, iq, cgc, nio.