The Market Speaks for Itself

I’m always reluctant to cover Politics and the Market. It is such an emotional subject. With today’s divided America, it’s become a 3rd rail topic. I find myself covering politics more than ever in 2020. It’s not that I want to. It’s that I have to. It’s inescapable. I’m not one to dodge an issue, either. As always, we focus on facts and interpret their significance while applying them to our investment strategies. The Market tends to speak for itself.

Politics are seldom drivers of stock prices. But they sure can be influencers at times. Now is clearly one of those times. The Dow and S&P finished out another eventful week, higher. Stimulus remains the primary driver and the President has done a complete 180. He now wants a comprehensive deal ahead of the election. It’s been reported that the President got spooked with the Market reversal earlier this week after he suspended the talks until after the election. The Stock Market is clearly an important scorecard for his administration.

House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin are back to talking again after the White House raised its offer to a $1.8 Trillion deal. It still seems like a slim chance that something gets done before November because of the politics involved. The Senate is not united behind more stimulus. The $2.2 Trillion House request is considered a non-starter. Senator McConnell does not have the votes. Besides, the House and Senate are already out of session. We shall see. Everyone says they want a deal, but nobody seems to be doing anything to actually reach a deal. There’s a whole lot of talk and little action. Some believe the President is panicking now, seeing the polls. Politicians keep politicking and voting has already begun.

The Market has made it clear it would be ok with a Biden Presidency; At least the more moderate Biden it has known for decades. Higher taxes at the high-end and corporate levels are expected. There have been some Market moves suggesting a Biden victory. Clean Energy, Industrials and Materials have rallied while Treasuries have sold off since the Presidential debate. This signals expectations of a large Biden-led stimulus package, with an emphasis on infrastructure and green energy. That spending would provide a positive shock to the stalling US Economy. But it will come with a large cost. The anticipated increase in spending has led to higher yields on Treasuries, which means lower prices.

This theme is also notable with activity in currencies. There has been increased buying of the Mexican Peso, which is up 6% against the Dollar in the past couple of months. The Euro has jumped in price too. The idea here is that a President Biden would go back to a rules-based global trade approach. Bets against the Russian Ruble have also increased. The Russian currency has declined 8% vs the Dollar, as a Biden administration would seemingly impose harsher sanctions on Russia.

A Biden victory is so far from certain, and investors continue to hedge their bets. We don’t need a reminder about the accuracy of polls. These national polls measure the popular vote. The popular vote doesn’t decide the Presidency. The Electoral College does. Trump won the Electoral but lost the Popular vote in 2016. The Options Market continues to anticipate large swings into end of year.

The Fed is still a critical component to the Market. Wall Street expects the Fed to begin paring back its bond-buying next year, and to phase it out completely by H2 of 2023. There are also expectations for purchases to decline from the current $120 Billion per month in Treasuries and Mortgage Backed Securities to $84 Billion by the second half of next year. It is expected to decline to just $25 Billion by the end of 2022. This actually runs counter to the recent Fed guidance.

This week Fed officials said they could actually increase their bond purchasing program at the long end of the curve to help push down borrowing costs. The Fed Minutes released this week stated some participants believe it would be appropriate for further asset purchases at the current pace to help the Market function and continue its accommodative conditions. Stocks certainly like hearing that.

The Bond Market seems to believe the Fed. 10-Year Treasury yields have jumped of late, but seem to have found a ceiling under 0.8%. It has barely strayed from that level. And it had every opportunity to go higher, with Bond prices going lower. It didn’t. The Market absorbed over $100 Billion in new Treasury issues this week and the yields barely backed up. In the face of all of that long end supply, the Treasury curve has been flattening. Somebody out there is buying Treasuries in size.

Something that is a really good sign is the broadening out of the rally. It’s not just strength in Tech. Financials, Industrials, Energy and Materials had their best week since June. This could be new leadership driven by a bipartisan supported infrastructure bill in 2021. That would be very stimulative. This was the best week for stocks overall since August. You could call it a melt up. There is still a lot of angst out there ahead of the election. You can feel it. You can see it. Volume has been low on up days and high on down days.

Importantly, the Credit Market shows very little signs of stress. This, despite no additional stimulus package. That is significant and positive. Visibility of an outright winner in the White House in November seems to be what matters most to the Market. The next 3 weeks will be eventful. The increased volatility will likely bring more healthy, corrective price action before year-end.

Another financial crisis does not appear to be imminent. That said, a contested election could certainly change all of that. It isn’t clear whether the second Presidential debate will take place next week. But there are rumors circulating that there might be a campaign rally at the White House this weekend. The road to November continues to be bumpy.

Have a nice weekend. We’ll be back, dark and early on Monday.


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