Kelly Evans: Off to the races

Crypto is surging, rates are flying, and small caps are absolutely soaring today. There are so many big movers, it's hard to keep up. The regional banks! The KRE ETF is trading at $65! Finally back to pre-SVB-collapse levels. Goldman Sachs is soaring 12% today--can you say deal boom, anyone? 

I've been asking around and I can't even find many traders who want to fade these moves. A friend of mine asked last night, when Bitcoin was first breaking out, if it meant that a move to $100,000 by year-end could now be in play. I replied, in typical contrarian markets fashion, that these moves could be a "buy the rumor, sell the fact" kind of event. But nope--nothing like that today. 

Another trader remarked to me, as we were texting this morning, that there hadn't really been a big "buy the rumor" kind of move in the first place, ahead of the election. But we did see markets putting on a "red sweep" trade last week. That's when yields first started popping, shares of DJT were steadily climbing, Tesla was up nicely, and so forth. 

It just evidently didn't go far enough. Plus, we had a bit of a "Harris pullback" on Monday after the Iowa poll was released, so perhaps that reset those trades for the rally we're seeing today.  

Can it keep going? The short, obvious answer is that in the long run, stocks always go up. The more tactical answer is that big breakout moves like these--especially the move in small caps today--often precede more long-lasting rallies. This was the third-biggest opening gap higher in the Russell 2000 today since it began trading in 2000, per Bespoke. The only bigger ones were in 2008, and 2020, which were near bottoms, not tops.  

The larger issue, though, is the vexing combination of (a) huge fiscal deficits--of which interest costs are now a large part; (b) a massive debt pile that is generating those interest payments; and (c) rising interest rates. This would seem to leave very little room for the expansionary fiscal policies Trump would like to see, including extending the personal tax cuts that will expire at the end of next year.  

So even if the GOP wins the House and pulls off the "red sweep," markets--specifically bond markets--could leave them with less room to maneuver than the results would otherwise indicate. I'm also curious if high rates will end up constraining banks, and the broader economy, and the Russell 2000, whose components have a lot of debt and made little money as rates surged over past three years, more than we're currently pricing in.  

And the irony is that the Fed is about to cut overnight borrowing rates again tomorrow, by a quarter-point, to just over 4.5%. Many are still convinced that at some point, longer-term rates will settle down enough to transmit these cuts more broadly throughout the economy. But the 10-year yield is now up almost a full point from where it was the day before the Fed delivered that jumbo rate cut in September.  

If the GOP can trim government spending, and deliver strong growth, and yields calm down, today's euphoria makes sense. And right now, markets are giving them the benefit of the doubt.  

See you very soon! 

Kelly   

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Twitter: @KellyCNBC

Instagram: @realkellyevans