How Election Year Politics Could Impact The Markets

*Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

POLITICS IN ELECTION YEARS MATTER

DJIA 52-wk: +12.51% YTD: +2.39% Wkly: -0.54%
S&P 500 52-wk: +23.18% YTD: +13.87% Wky: +1.58%
NASDAQ 52-wk: +29.21% YTD: +17.84% Wkly: +3.24%
Tech Select ETF 52-wk: +31.46% YTD: +18.28% Wkly: +5.60%

Markets are concerned that a government led by either the populist right or a possible left-wing coalition would move to grater protectionism, government intervention, and immigration curbs, resulting in a widening budget deficit and reduced European integration. Neither side is dedicated to free-market principles, fiscal responsibility or even the euro, write Macquarie strategists. “And neither is seen as particularly good at governance,” they add.

French CAC 40 had its worst week in over two years, falling 6.23%. The sell-off accelerated at week’s end, with the index dropping 4.60% in the final two sessions and 2.66% on Friday alone. That put it near correction territory, off 8.94% since its recent peak on May 15.

QUICK COMPANY NEWS:

Cruise-ship operators were among the market’s biggest losers after analysts at Bank of America flagged softening price trends for trips. Norwegian Cruise Line dropped 7.5% for the worst loss in the S&P 500, and Carnival fell 7.1%.

QUICK COMPANY NEWS II:

At its developer’s conference, Apple revealed a deal with OpenAI to integrate ChatGPT into its devices. Elon Musk threatened to ban Apple at his companies as a security risk and dropped his lawsuit against OpenAI for abandoning its original mission; Tesla shareholders approved his roughly $48 billion pay package. Oracle had so-so results but announced AI deals with Google, Microsoft, and Open AI. The EU boosted Chinese EV duties; China promised retaliation. KKR, CrowdStrike, and GoDaddy will join the S&P 500.

Competition for trading volumes is nothing new, but winning more listings would be truly disruptive

Equities have been traded in Dallas long enough to be an old Wall Street punchline. But equities being listed in Dallas? New York might not find that so funny.

A group backed by BlackRock BLK -0.05%decrease; red down pointing triangle and Citadel Securities is planning to launch a share-trading venue to be based in Dallas and called the Texas Stock Exchange. It will be an electronic exchange on which companies can also list their shares.

It is hardly unprecedented for an upstart to nab trading volume from the traditional big names in U.S. stock trading, the New York Stock Exchange and Nasdaq. Earlier this century, two electronic exchanges, BATS and Direct Edge, grabbed big chunks of exchange volume in part by riding the rise of high-frequency trading firms.

Things have continued to evolve. Those two venues have consolidated, first with each other, and then via acquisition by options-trading giant Cboe Global Markets CBOE -0.66%decrease; red down pointing triangle. NYSE was absorbed into Intercontinental Exchange ICE 0.30%increase; green up pointing triangle, which arose as an upstart commodities market. The past few years have also seen new players emerge, including IEX, Members Exchange, and MIAX Pearl Equities.

Collectively, “other” exchanges traded 6.5% of daily average U.S. equity dollar volume in 2023, according to figures compiled by the Securities Industry and Financial Markets Association from Cboe data. What is more, nearly 42% of daily average dollar volume traded “off exchange” last year, such as in alternative venues sometimes called “dark pools.”

So talking about disrupting two giants of stock trading may come across as a bit antiquated. Except in one key respect: Where companies actually list their shares.

A stock listed in the U.S. on one exchange can trade electronically on another under U.S. market rules. So a trade could “happen” in New York, Dallas or wherever data centers are located. Deciding where to trade a stock involves a complex matrix of factors, done mostly by quants and computers.

But where a company decides to list is a far more human and sales-driven question, especially on its initial public offering day, which often doubles as a marketing event. There are technical factors, of course, such as different IPO opening mechanisms. And exchanges do tout superior trading quality for their listings. But a listing decision also brings to bear soft factors like branding and reputation—even down to things like whether the chief executive wants to be seen ringing the bell on the NYSE trading floor on Wall Street, or on a Times Square billboard outside of Nasdaq’s market site.

The risk of trying something new and messing up an IPO, often a crowning achievement for a company, likely often far outweighs other considerations.

Listing is also a serious business: At both NYSE’s parent ICE and at Nasdaq, revenues from the business lines for listings (which was data and listing services at Nasdaq) were larger in the most recent quarter than the net revenues from cash equities.

All of which perhaps helps explain why other venues have succeeded in drawing swaths of trading volumes, but not company IPOs or switches in listing venues. Operators such as Cboe or the Long-Term Stock Exchange have so far garnered only a handful of U.S. listings by companies. Cboe currently counts just three U.S. company listings, according to its website, though it has over 680 exchange-traded fund listings in the U.S. It launched its current global listings platform a year ago.

Maybe an upstart that offered a U.S. listing alternative with the right reputation or branding attributes—for example, with different board composition requirements that a company prefers for governance or political reasons, or by touting a geographical appeal, say to the Lone Star State—has a shot at enticing certain listings.

The “TXSE” hasn’t applied to register with the Securities and Exchange Commission yet. And NYSE and Nasdaq certainly aren’t going to just cough up their clients, which have historically been very tough to pry from those historic venues.

But even in our digital trading age, pitching a listing based on culture or brand isn’t as funny as it might sound.

By Jack Hough

More U.S. houses are coming up for sale, builder stocks are dipping, and one Wall Street firm sees a buying opportunity. Meanwhile, a discreet peddler of erectile dysfunction pills has gotten into knock-off obesity meds, and its shares are jumping—careful there. These two items are unrelated as far as I know, although I’m not a trained carpenter-urologist. Let’s start with housing.

Shares of many of the big home builders are up nicely in recent years but have sagged since March.

Toll Brothers

TOL

-1.21%

is down 8%

Lennar

LEN

0.04%

10%, and

D.R. Horton

DHI

-0.47%

14%

while the S&P 500 is up 3%. Mortgage rates don’t explain it; the 30-year climbed since March, then eased, and now isn’t much changed, at just under 7%. Mixed economic signals don’t seem to explain the builder selloff, either. UBS blames an uptick in home inventory. The latest readings from the U.S. Census Bureau and the National Association of Realtors show 1.52 million single-family homes for sale in April, including 474,000 new and 1.05 million existing. That’s a 15% increase from a year ago.

That raises two concerns for investors. A housing shortage has kept selling prices high, and profits for builders fat. Also, publicly traded companies, which have the resources to keep land and labor in supply, have taken market share. If a rush to sell homes is taking hold, big builders could give up more gains. There are worrisome signs here and there. In Tampa, Fla., inventory is up more than 60%. In Austin, Texas, and Portland, Ore., prices are falling.

But there’s reason to believe that builders can continue their bull run. Nationwide, inventory is up but still exceptionally low. On average since 1982, there have been 2.36 million single-family units for sale, or 55% more than the latest count. UBS reports that houses for sale skew old and expensive. Redfin, an online broker, finds three in five home listings are stale—more than 30 days old and not in contract. Two in five are older than 60 days. Some homeowners, it seems, have heard about tight supply and lavish sales prices, and are shooting for the stars.

Mortgage holders with low locked rates remain reluctant to move into higher ones. Some 61% of outstanding loans are fixed below 4%, and 77% are below 5%. UBS notes that rising house listings in Florida, Texas, and Arizona represent 41% of the national increase, and are a normalization from low levels. Parts of Florida have been hit by lingering damage from 2022’s Hurricane Ian, rising insurance costs, and angst over what is projected to be a record year for named storms.

In a report this past week, Ned Davis Research estimates that nationwide, the U.S. remains short by 2.2 million housing units. There is a record number of multifamily units under construction. But the number of permits is sliding, suggesting that the boom won’t last.

UBS takes all of this to mean that builders Lennar and KB Home

KBH

-1.54%

which report quarterly financial results next week, will pleasantly surprise Wall Street. It views the shares as attractively priced, with Lennar at 10 times forward earnings estimates and KB at nine times. More broadly, it argues that the home-builder group has undergone a “vast transformation” for the better since the global financial crisis, and deserves a higher valuation.

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