After all the twists and turns so far in 2020, the markets enter the final quarter of the year still working through several potential scenarios, including: President Trump maintaining office or a new administration and policies, a “Blue Wave” outcome, a contested election, as well as the arrival of a vaccine in the face of rising COVID-19 cases at home and abroad.
Will the world see a Blue Wave or a Shy Wave again?
A Blue Wave
A Democratic sweep of the White House, Senate, and House of Representatives would represent a “Blue Wave.” Investment banks such as Goldman Sachs and Nomura have put together baskets of stocks that they believe should do well under a Trump or Biden Presidency. Currently, the Biden basket of stocks is outperforming, suggesting that the market is speculating on a change in the White House.
A Blue Wave could provide the market with a near term stimulus boost as any fiscal package would move through the gears of Washington with much less opposition. This outlook may provide for a reduction in trade tensions as well. This influx of stimulus may be what the market is starting to bake into its assumptions as it tries to rally into the election. The concern around higher taxes and greater regulation is cast aside for now, as the stimulus money is assumed to wash over the markets far sooner, and would at a minimum, offset any new taxes or regulations that would arrive on the scene. Additional stimulus could bring about a material shift in fortunes for small/mid cap stocks, cyclicals, and industrials, while at the same time shifting money out of the big tech stocks that have had such a run of late.
A Shy Wave
The shy Trump voter was a surprise in 2016 and quite possibly will be a surprise again in 2020 with a Trump reelection – the “Shy Wave.” A study by CloudResearch LLC found that Republicans and Independents were twice as likely as Democrats to not give their true voting intentions to a telephone poll. Approximately 11% of Republicans and Independents vs about 5% of Democrats would not provide their true feelings. This opens the door one more time for the support for President Donald Trump to be understated in the current round of polling. Interestingly, as can be seen by the chart below, the trajectory of President Trump’s polling numbers are eerily similar to the path of 2016, but from a much higher level.
Additionally, a poll by the ABC News/Washington Post found Trump voters more than twice as enthusiastic about President Trump as Biden voters are about the former Vice President.
While certain basket of stocks as mentioned above are suggesting a Biden victory, the overall market return three months prior to Election Day has had a strong record of predicting the winner. A positive return has signaled a victory for the incumbent 20 out of 23 times, an 87% hit rate. Currently, the return is 7.3%, signaling a Trump victory.
From a stimulus perspective, President Trump, if reelected, is also expected to keep the spending taps open in a big way in an effort to keep the economy growing. That said, the details of each potential stimulus package would be different. A Democrat-led package would likely involve more support to cities, states and larger stimulus payments to individuals. A Republican-led package would be more geared toward supporting businesses via the Paycheck Protection Program and a smaller targeted stimulus toward individuals. Hence, either eventual winner appears to point to further stimulus, which for now appears to be a net positive for the markets.
The different data points presenting alternative paths to victory for each candidate is why a survey by Bank of America finds that 61% of money managers believe that the outcome of the ballot counting will be challenged. The assumption is that the ensuing court battles and uncertainty will bring about a great deal of market volatility. Wall Street strategists, on the other hand, are starting to become more certain that the outcome of the election will be clear and that the polling will be correct this time around.
A clean election should provide the environment for the market to move higher, while the challenged election scenario the opposite. Both outcomes are being met with a moment in time where virus and stimulus fatigue are setting in here and abroad, causing spikes in cases, and two very important Covid-19 trials have been put on hold due to unexplained patient illness. Lockdowns are unlikely again, however, a rising case count may bring about slowing growth again. When we look out six to twelve months into the future, there is light at the end of this tunnel: the election will be resolved and the odds that a vaccine will be available are high. As the next twelve months bring more resolution to big picture items that have concerned investors, in the near term many of our portfolios will continue to maintain their moderate underweight to risk assets. As always, we will monitor events and make changes as conditions warrant.
To be continued…
As always, vote your politics but do not let politics influence your investing. Regardless of which party is in power, the US economy and the US stock markets have found a way to grow.
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