An in-depth look at price action among share prices over the last few months show a clear trend: companies that would benefit from a Democratic sweep in November are outperforming those that would benefit from a second term for Donald Trump. Quietly, and with little mention in the press, the market has priced in a Biden victory.
We have all learned something clear and obvious this year: we knew the Federal Reserve was powerful, but we didn’t know it could decouple the stock market from the reality of economic activity taking place across the country. With massive monetary stimulus, and some assistance from fiscal deficit spending, the Fed has engineered the biggest, fastest S&P 500 rally in history which has significantly outpaced the recoveries of developed stock markets in Europe, Japan, Australia and Canada. This despite the US experiencing a rapid rise in COVID-19 cases, resulting deaths, announcements of new business lockdowns, rising bankruptcies and falling consumer sentiment.
However, if we peer underneath the surface of the Fed’s liquidity-driven rally, a counterintuitive event is taking place: ‘green’ stocks are surging.
Stocks in the areas of solar panels, wind turbines, electric vehicles, HVAC retrofitting, hydropower and lithium mining should not be rising faster than broader market indices in the face of a collapsing GDP and oil prices having fallen from $63 to $42/barrel since the first of January. After all, demand for energy is down and hydrocarbons are cheap, yet shares of alternative energy companies are soaring.
We have entered into a sudden and pronounced recession,
the price of oil is down,
energy (XLE) and industrial (XLI) stocks are underperforming the broader market (SPY),
yet ‘green’ stocks are surging.
Many have heard that Tesla (TSLA) stock has more than doubled in 2020, but this could possibly be explained away as a short squeeze and the stock becoming a ‘fad’ holding among small investors. However, it is difficult to explain away the dramatic outperformance of so many stocks across the alternative energy space. The above chart shows the price action of the Invesco Solar ETF, Denmark’s Vestas Wind Systems, the largest wind turbine manufacturer, and Brookfield Renewable Partners, an operator of primarily hydroelectric power plants. Similar outperformance is taking place across almost all of the ‘green’ stock space supporting the prices of shares ranging from wind turbine blade maker TPI Composites (TPIC), lithium miner Albemarle Corp (ALB) and biofuels producer Renewable Energy Group (REGI). The more speculative the name in the space the better: loss-making hydrogen fuel stocks Plug Power (PLUG) and Ballard Power (BLDP) have soared almost as much as Tesla so far in 2020.
What could explain what is going on in the stock market? The most obvious answer is politics. If there is a dramatic difference between the policy platforms of Mr. Biden and Mr. Trump it is on energy. Where the Democrats are running on a “Green New Deal”, the Republicans battle cry is “Drill Baby Drill”. That traditional oil and gas stocks are down 40% YTD while alternative energy names are soaring makes it clear that investors are voting with their wallets. The Biden plan calls for trillions to be spent on green energy research and infrastructure, expanding tax incentives for investment in the space, and the imposition of a tougher regulatory regime on the hydrocarbon industry. Republicans buy stocks just as often as Democrats and investors from both parties have come to the conclusion that there soon will be a change in power in the White House and a major transformation in government policy.
For more on how a Green New Deal will impact the US economy and sectors of the stock market, please see Hot Stocks: Investing for Impact and Profit in a Warming World available at an online bookstore near you.