One of the crazier weeks in a long, long time, both from a political as well as a market perspective. Obviously, the political backdrop is…what’s the word???…fluid at the moment. But the betting markets at least are pointing to a 92% chance of a Biden win, as you can see below.
The Senate is a closer run thing, but so far the same betting markets are giving the Republicans a 2-seat majority.
But of course, the Senate outcome is in flux. As BCA notes:
“More positively for the GOP, the Republicans gained a net six seats in the House of representatives, and held onto the Senate thanks to surprise victories for their candidates in Maine and North Carolina. That said, the Senate could still revert to Democratic hands depending on the final vote tally in Georgia, North Carolina, and Alaska; PredictIt assigns a 26% probability to the Democrats taking the Senate. Moreover, even if they fall short this time around, the Democrats still have a chance of winning a 50-seat de facto majority in the Senate if both Georgia races go to a run-off election on January 5.”
But the general theme of divided government applies. No one side has a mandate.
The markets obviously celebrated the outcome. Equities rallied hard election night and the gains continued basically all week. And this became something of a Rorschach test. People saw what they wanted to see when they looked at the market results:
– The market rallied because Biden won.
– No, it was up because the Republicans kept the Senate.
– Oh, please, the market was up because government is dividend and nothing will get done.
– No way!! A split government means the policies that will be passed will be moderate.
Take your pick. Who knows? Maybe the reason the market was up was simply that we had a result, any result. Or maybe the result we had exceeded people’s worst fears. After all, prior to Tuesday you were seeing headlines like the one below. A revolution? You mean like with guillotines?
It’s not often that the fear of violence accompanies an election in the U.S.
Even Walmart temporarily made the news.
Tensions were high going into the election, and say what you will about the election, the dire scenario didn’t come to pass (as it usually doesn’t).
For the market at least, there is something to the idea that the probable outcome is favorable for risk assets. A GOP Senate (or no clear majority) will preclude major corporate or individual tax hikes. A Biden win probably means an easing of the trade war which should boost global trade. And the prospect of no late-night tweets could mean less volatility which in turn could lead to renewed inflows into risk assets. We shall see.
From Blue Wave to Blue Fade
One thing is for sure, over the last few weeks the market had been trading like we were on the cusp of a blue wave. Take for example:
– Bond yields had moved higher on the prospect of massive fiscal stimulus.
– Gold started to lag as real yields increased.
– Value started to outperform growth as investors rotated into the potential winners from massive fiscal spending.
– Small-cap stocks were also outperforming for the same reason.
– Conversely, the tech darlings were cooling off, as you can see below.
However, on Wednesday this turned into the ‘blue fade’ trade. All the above trends reversed sharply. The move in the bond market was particularly interesting, as you can see below. On hints that the Senate would stay red bond yields melted quickly as the odds of major new fiscal stimulus was priced out of the bond market.
But it is probably a bit too soon to write off a fiscal package altogether. To start there is this.
BCA’s comments on Friday are along the same lines:
“…Third, and perhaps most politically salient, public opinion favors more expansionary fiscal policy. About 72% of voters support a hypothetical $2 trillion stimulus package that extends emergency unemployment insurance benefits, distributes direct cash payments to households, and provides financial support to state and local governments (Table 1). Such a package is basically what the Democrats are proposing. It is noteworthy that when this package is described in non-partisan terms, even the majority of Republicans are in favor of it.”
So, while the composition of any fiscal package might have changed, the odds probably haven’t shifted dramatically. Tax hikes are probably off the table, COVID relief is still on the agenda.
The table below is somewhat tongue-in-cheek, but the sentiment feels about right.
Again, we will see.
Charts We Found Interesting
1. Daily case counts surged in the U.S. this week.
2. As they did in Europe.
3. Friday’s jobs report was solid. Nonfarm employment increased by 638,000, which was impressive considering that a decline in the number of temporary Census workers subtracted 147,000 from this headline number. The unemployment rate fell much more than expected – from 7.9% in September to 6.9% last month.
4. Bet you didn’t know there was a Fed meeting this week? Not much happened. Rates stayed where they were and they wondered out loud about buying more bonds. The most interesting comment came from Chairman Powell during the press conference – “We wouldn’t consider money-financed fiscal policy.” By this he means they wouldn’t directly underwrite fiscal deficits. Ummm, but it seems like they have been all year.
5. More political statistics. If the Senate stays red, this will be the first time since 1900 with a blue/red/blue combination.
6. Not sure I believe this? Highest turnout since 1900??
7. Interesting stats on how litigious we are compared to other countries.
8. Totally off topic, but remember when Greece was going bankrupt and their debt was selling at double-digit yields? Yea, that’s not a thing anymore.
9. More fuel for a hot housing market.
Have a good weekend.
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