Finding the Good News Postelection and Vaccine Predictions – Barron’s

I like when predictions of unknowable things come with impossible levels of precision. If youre going to tell me how various U.S. election outcomes will affect the spread between Italian and German government bond yields in 2022, I see no reason to skimp on the decimal places. So imagine my delight with a new pre-election report from UBS that lays naked the worlds financial future with titillating specificity.

There is plenty for partisans on both sides to cheer and to curse. Gross domestic product will fare best, in UBSs view, if Democrats sweep, in part because of the increased chance of big spending packages passing.

That route, however, also produces somewhat higher inflation, and more of a rise in 10-year Treasury yieldswhich are seen rising in all election scenarios. Since higher bond yields compete with stocks for investor affection, stocks do worse under a Democratic sweep than if Joe Biden wins the presidency and if Republicans hold the Senate.

I wont dwell on these things, because theyve been amply covered elsewhere by now, and because again, I dont think theyre particularly knowable. But UBS analysis is interesting for two broad reasons. First, there is no doomsday scenario. The bank has the S&P 500 rising 17.2% through 2022 under the status quo, 23.3% under a Democratic sweep, and 26.2% if Biden wins but the Senate doesnt flip.

Id be delighted with any of those numbers, given the 10-year run weve already had. Vote for candidates you believe will govern well, and let the stock market take care of itself.

Second, UBS predicts that a Covid-19 vaccine, and how quickly it is delivered, has roughly the same pull on cumulative stock-market returns through 2022 as the election outcome.

That is, the banks highest-return forecast by election outcome is nine percentage points higher than its lowest-return one. Meanwhile, the return spread between its optimistic and pessimistic vaccine assumptions is also nine points. Under the optimistic assumption, we will have a vaccine late this year, and we will achieve herd immunity by the end of 2021. Under the pessimistic one, the vaccine doesnt arrive until the end of 2021, and herd immunity takes longer to develop.

I dont put up election-year lawn signs, but if I wanted to make an exception this year, mine might say Pfizer (ticker: PFE), Moderna (MRNA), and AstraZeneca (AZN), plus others in the Covid-19 vaccine race. If you are optimistic about a vaccine, but dont want to pick a drug stock, UBS has an idea. By its math, vaccine hope is already 80% priced into the U.S. stock market, but only 46% priced into U.S. value stocksthere are no decimal places, sorry to say.

If the bank is right, a vote for value stocks could pay off nicely if the lab-coat set has a breakthrough soon.

A wild ride for stocks this year is profiting companies that execute trades. Nasdaq (NDAQ) recently reported a 15% increase in revenue, to $259 million, from what it calls market services, which include stock trading.

Thats good news for its shareholders, of course, but more important is whats going on in a division called information services. There, revenue shot 20% higher last quarter, to $238 million.

The division could soon be Nasdaqs biggest, accounting now for one-third of revenue. It makes money from selling data and analytics to sophisticated traders and crime fighters, and from licensing indexes to fund companies.

There are other business units that charge companies to list their shares on the Nasdaq Stock Market, and that sell financial plumbing to power stock exchanges around the world.

Were really a global technology company that serves the capital markets, says Adena Friedman, who ran Nasdaqs first data operation 20 years ago, and has been CEO since 2017.

One reason Friedman might want Nasdaq to be viewed as a technology seller is that investors are paying handsomely for such companies now. If Nasdaq were merely riding a stock trading boom this year, investors would worry about a fizzle next year. But around two-thirds of revenue now comes from non-trading sources. Nasdaqs forward price/earnings ratio has doubled to 20 over the past eight years.

There are challenges. A technology boom in the 1980s and 90s put Nasdaq and its Silicon Valley stock listings on the map, but it also gave rise to the modern internet, which has lowered barriers to entry for upstart stock exchanges. Fees there could fall as competition rises, which is all the more reason for Nasdaq to push into data and tech.

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Friedman says one of the companys newest products uses artificial intelligence to scan for signs of money laundering.

I asked Friedman how much algorithmic trading influences market movements. It accelerates things, she says, but human sentiment still deserves most of the credit or the blame. What do data buyers do with information about Joe and Sally Savers stock trades? They use it to better position themselves for future trading, and it doesnt leave Joe and Sally worse off on their executions, she says.

Are Robinhood bros driving tech stocks to absurd valuations, in between chest-thumping tweets and swigs of mango hard seltzer?

No, she explains, low bond yields have flattered stocks, and tech stocks stand out for two reasonsbecause fast growth is scarce, and because companies have separated into two classes, based on how vulnerable they are to the virus.

Wall Street predicts a 21% surge in Nasdaqs earnings per share this year, a minimal increase next year, and a 7% increase in 2022. The company has beaten estimates in 19 of the past 20 quarters. Its shares have returned 21% a year over the past decade, eight points better than the S&P 500 index.

Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barrons Streetwise podcast.

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Finding the Good News Postelection and Vaccine Predictions - Barron's