'The Republic will live.' So said Tilden
Virus and election risks weigh on investors.
Lots of virtual meetings this week and all were focused on the election. Who is going to win? (If the election were today, Trump’s odds aren’t good.) Does the Supreme Court vacancy impact the election? (Personally, I don’t think most Americans are focused on the Supreme Court.) What do you expect to happen at Tuesday night’s debate? (I’ve loaded up on popcorn.). How much does it matter to the markets who wins? (What trumps any of these worries? How about $4.5 trillion on the sidelines and a Fed not thinking about raising rates?) Polls in key swing states are tightening, but at this point, Biden appears to have an edge (more below). The expected flood of mail-in ballots—surveys suggest up to half of votes could come via the mail—could get messy. This is the one uncertainty I hadn’t thought was yet priced into the market. Indeed, a few weeks ago, Strategas Research noted the shape of the VIX curve was typical for an election year—October volatility (expiring pre-Election Day) was trading at a premium to November volatility (expiring post-Election Day). At the time, it expected this could flip on contested-outcome concerns. But it didn’t expect this to occur so quickly. The November VIX now trades well above the October contract on this event risk. “It’ll be weeks before the winner is known” is now the entrenched consensus. Goldman Sachs calls hogwash. It thinks the combination of early polling, mail-in ballots and county data will be enough to establish a clear victor on the night of Nov. 3. FiveThirtyEight, the opinion poll website, thinks my home state may be the tipping point. Along with Florida, Trump needs Pennsylvania. Voters here heavily used mail-in ballots in this year’s primaries. It didn’t go well. Some races weren’t called for weeks. Thousands of ballots were tossed out. And this week, we learned the feds are investigating procedures in my state after some presidential mail-in ballots were found in a dumpster in Luzerne County. There are so very many flavors of popcorn!
Polls consistently have shown Trump leads on the issue of the economy, so what happens over the next 40 days with Covid-19 is all that matters in this very close election, Fundstrat says. It notes there’s been a set of rising worries about Covid that is feeding a sense among some that "worst is yet to come,” including renewed restrictions in Europe, the FDA’s new higher threshold for approving a vaccine and the back-to-school/flu season. But it’s been almost a full month since schools reopened and the Covid spread has been surprisingly contained. With about 20% of the U.S. population in schools, about 20% of the daily cases should be coming from K-12/colleges—about 8,000 a day. The numbers have been nowhere near that—nothing like the explosion in cases the first 21 days after the virus hit Italy, then New York. And yet Trend Macro notes even though U.S. cases are near their lowest in three months, a recent New York Times headline reported, “The fall surge is here”! A renewed outbreak has pushed infections to new highs in Europe, which has overtaken Latin America as the No. 2 region in the world for daily cases. But wherever cases are rising, including many Plains and Western states in the U.S., hospitalizations remain low with deaths concentrated in the older population (bad for people, less bad for the economy). In China, where the crisis began, the virus is almost nonexistent, with its economy now running above pre-pandemic levels.
Unless markets are convinced the economic path for the next 12 months is wildly divergent between Biden or Trump, the post-election outlook has a lot of positives for equities. These include an ultra-dovish Fed; an expanding and recovering economy; $4.5 trillion of cash on the sidelines; a pullback that has blown off froth; and bearish retail investors, with AAII sentiment persistently negative. Moreover, Fundstrat notes that bond valuations imply a higher equity P/E, with investment-grade bonds trading at 53 times their price-to-coupon, vs. S&P 500 equities at a 20 P/E multiple. None of these factors are historically associated with major market tops but rather earlier stages of recovery. True, incoming economic data has not been universally strong and no longer is surprising as robustly as it was this summer. But consumers seem to be healthier than is apparent. The latest Chase credit card spending tracking shows September was the best year-over-year (y/y) month since the start of the pandemic. With earnings season just around the corner, Ironsides Macroeconomics expects to see plenty of strong results much as Nike reported this week that remind investors we are early in the business cycle when earnings momentum and returns are strongest. Now that it’s clear Q2 GDP marked the bottom and Q3 will be a blowout (more below), Strategas says the question of the fourth quarter largely will be a matter of the virus and the election. Unless there is a decisive outcome, there is a good chance of event risk as surveys suggest a significant chunk of the population believe cheating will determine the result, Cornerstone Macro says. For the economy and the markets, I say chill. Samuel Tilden was a Democrat who lost the 1876 election under questionable circumstances. A few months afterward, Tilden said, “If my voice could reach throughout our country and be heard in its remotest hamlet, I would say: Be of good cheer. The Republic will live.”
- Housing a macro driver Near record-low mortgage rates and tight supply helped new and existing home sales rise again in August, with both hitting 14-year highs. The 43% y/y increase in new home sales represented the fastest annual pace since 1992. Prices also continued to climb. Housing’s wealth effect is helping prop up consumer spending as it faces the dual drags of high unemployment—the latest jobless claims remained four times above pre-pandemic levels—and expiring fiscal stimulus.
- A pickup in capex is bullish New orders for non-defense capital goods ex aircraft, a closely watched proxy for capital expenditures (capex), increased 1.8% last month, far more than expected, and an already strong July was revised higher to 2.5%.
- Q3 GDP shaping up as record-setter … Markit’s first take on September continued the trend of improving U.S. data, with manufacturing reaching its highest level since January 2019 and services posting its second-best reading since March 2019. It’s expected Q3 GDP, due just days before Election Day, will smash records. The latest Atlanta Fed GDPNow forecast is for 32% annualized growth.
- … Q4? Not so much Goldman Sachs halved projected Q4 GDP growth to 3% annualized, citing the lack of any meaningful new fiscal stimulus. It had assumed Congress would attach $1 trillion to the continuing resolution keeping the government funded into December and now thinks further stimulus won’t come until early 2021. House Speaker Pelosi and Treasury Secretary Mnuchin separately said yesterday that Phase 4 discussions could restart in a few days. A deal before the election? Hmm.
- It looks worse in the U.K. Prime Minister Boris Johnson’s decision to disallow extension of the Brexit transition period after his reelection a year ago has proven quite bearish—since then, Britain’s had the world’s worst-performing major currency, stock market and economy. Now, with the year-end deadline looming, he wants authority to override parts of an already signed withdrawal agreement. While a likely negotiating tactic, it raises odds of a hard Brexit that, along with resurging Covid infections, renewed stringency measures and reduced stimulus, makes for a perfect economic storm, Ned Davis says.
- Pause for thought Wolfe Research sees characteristics of bubble peaks developing for the S&P, Nasdaq and Nasdaq 100: lower post-peak highs and the inability of those lower highs to get to or hold above their respective 50-day moving averages.
Election watch Trump’s job approval and favorability ratings are almost exactly where they were going into the 2018 election, when a blue wave washed the GOP out of the suburbs (and 40 House seats) from coast to coast. The generic ballot is in the ballpark of where it was then, too. These findings undermine the thesis of shy Trump voters or a pro-Trump silent majority. While Trump wasn’t on the ballot in 2018, Cornerstone says the argument there is much broader support for him than polls suggest is certainly hard to square with his party taking a historic drubbing in the midterms.
It’s too early to sweat record deficits Countries such as the U.S. that don’t have a history of defaults, have strong independent central banks, and deep and healthy capital markets can afford to borrow much higher amounts than other countries, Bank of America notes. And with the dollar serving as the global reserve currency and U.S. Treasury market as the center of global capital markets, the U.S. has the largest borrowing capacity of any country. Moreover, because of record low rates, updated Congressional Budget Office cumulative deficit projections through 2030 have fallen from their pre-pandemic levels due to sharply lower debt service costs.
Nonlinear storytelling Quentin Tarantino walks into a bar…