Now what's priced in?? Now what's priced in??\images\insights\article\office-window-small.jpg October 9 2020 October 9 2020

Now what's priced in??

A contested election is consensus, with little worry about who ultimately wins.

Published October 9 2020
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For all the noise and talk of uncertainty, the 2020 presidential race has been remarkably stable. Biden continues to maintain a lead in national and most battleground state polls. There even was some widening this week, with prediction markets starting to re-price. But they remain circumspect. There are a lot of similarities to where Trump is now versus this moment four years ago. Can he pull another rabbit out of his hat, like last time with Comey’s Hillary e-mail revelations? A contested election remains the consensus, but volatility futures aren’t assigning a lot of event risk around election time. If anything, it feels to Fundstrat as if stocks have made their pre-election bottom. Maybe that’s because market-friendly events are ahead regardless who wins. A stimulus deal still likely passes, further additional spending if Biden or tax cuts if Trump, eventual Covid containment and continued unprecedented liquidity. You suppose this is priced in? Who cares who wins was articulated this week by Fundstrat, Cornerstone Macro, Evercore ISI and Jefferies, among others. Consensus.

Contested election or no, risk is on. A momentum surge is underway in small caps, with the 10-day percentage change in the Russell 2000 solidly in the 99th percentile of all historical observations. ISI sees a uniquely bullish bipartisan backdrop for risk-takers, borne of the pandemic and propelled by policy, politics, positioning and price. Those factors have driven Big Tech, growth stocks and the “Pelotonomy,” the boom in e-delivery and streaming of goods and services such as the Peloton bike. But a budding expectation of better times ahead—the latest Atlanta Fed GDPNow tracking estimate for Q3 GDP is 35.3% annualized—is already giving rise  to a reversal of trends, with economically sensitive cyclicals in the machinery, transportation, logistics, materials, housing and consumer sectors taking over leadership. Eventually, breadth should extend to defensive plays across health care, utilities, staples and REITs. All are welcome!

Then, there’s the nightmare scenario. An election law expert provided by Trend Macro believes comparisons to the last contested election, Gore-Bush in 2000, are inappropriate. In that case, just one state, Florida, was in doubt. This time, we are far more polarized and politically charged, fueled by social media, with a much larger number of states potentially in question amid 10 times the normal volume of mail-in voting. We are likely to know Florida, a must-win for Trump, reasonably early as it allows the counting of mail-in ballots three weeks in advance of Nov. 3. But in three key swing states—Michigan, Wisconsin and Pennsylvania—that went to Trump by thin margins in 2016, counting can’t start until Election Day. It’s expected half the ballots in those states may be mail-in, with the possibility a confirmed winner may not be known before Dec. 14, the official date when states name electors to the Electoral College based on their popular vote. With each of the three states having a Republican legislature and Democratic governor, it’s possible they can send two separate slates of electors to the incoming U.S. House, where the final vote will be certified in early January! Who will arbitrate this? Trend Macro’s law expert suggests the Supreme Court won’t want to decide a clearly political decision. FiveThirtyEight’s model estimates there’s a 5% chance that at least one decisive state will see the candidates within a 0.5% margin, so there’s a non-negligible chance the election could come down to an incredibly close vote in one of these states. Surveys show a quarter of the people on both sides, Democrats and Republicans, believe the election will be rigged if their guy loses. A third on each side say some amount of violence will be justified. An advisor friend, a bull who has been right for years, says if the S&P 500 is above 3,294 come Nov. 3, odds are Trump will be reelected. He notes in 1980, Ronald Reagan (who won in a landslide) was way behind, according to Gallup, the Sunday before the Tuesday election. I surely do hope it’s a landslide…


  • The U.S. service sector is coming back ISM’s read on September beat estimates, led by rising new orders and a move by employment into expansion territory for the first time since February. This is encouraging since this is the sector most exposed to coronavirus—activity requires close physical proximity to customers in many cases. The experience here is unusual as service activity in many other countries tailed off last month amid renewed increases in Covid cases.
  • Cars are selling, too New vehicle sales rose 7.6% in September, their fifth straight monthly gain. Used-car sales have jumped, too, pushing their average price up 7.7% annualized for July and August combined, the biggest two-month increase since 1969. Behind this growth: used cars have become a good alternative for public transportation for lower income people seeking to social distance.
  • The housing boom has just started Applied Global Macro Research is forecasting a 1983-style boom in single-family permits over the next 1-2 years—an upturn almost twice as big as the 2003-2005 “housing bubble.” Home-price increases should be larger, as well. The drivers: a decade of underbuilding relative to demographics, resulting in the longest and largest decline in vacancy rates ever, with the supply of existing homes for sale relative to the adult population nearly half their lowest levels in the 1980s and 1990s. Add to this 30-year mortgage rates heading for the biggest 2-year decline since the mid-1980s, acting like gasoline on the tinderbox, with the pandemic shock as a spark.


  • Jobs may be a drag Initial jobless claims held at four times higher than their pre-pandemic levels, while voluntary quits declined, suggesting a decline in worker confidence. Gradual improvement is evident: the number of unemployed per job opening has fallen by more than half since April’s peak, and continuing claims were much improved vs. consensus, lowering the implied jobless rate to a new recovery low. But moderating improvement could be a worry for holiday spending.
  • Trade won’t help GDP The trade deficit increased more than expected in August to a 14-year high and just shy of its all-time record. One issue: export purchases from China are running short of Phase One promises.
  • Globally, letting our guard down Lockdown fatigue has people going out, causing Covid cases to rise in much of the world as we enter flu season. Worrisomely, the biggest increases in the U.S. are in states where cooler weather has arrived, sending people indoors.

What else

‘You have two minutes uninterrupted’ That’s the answer to the question, “What’s the biggest lie in American politics in 2020?” So jokes Sankey Research, adding that at least the fly on Vice President Mike Pence’s head during the vice presidential debate with challenger Kamala Harris knew when his two minutes were up. The debate was the second most-watched vice presidential debate since records began in 1976, drawing 59 million viewers. The 2008 Palin-Biden debate drew 70 million.

Should we listen to these scientists? TIS Group reports that three of the world’s top scientists, Dr. Sunetra Gupta (Oxford), Dr. Martin Kulldorff (Harvard) and Dr. Jay Bhattacharya Stanford), have started an anti-lockdown petition calling for the U.S. and U.K. to build herd immunity to Covid-19 as social distancing rules “are having damaging physical and mental health impacts.” After only a few days, the declaration has been signed by 1,500 scientists and 1,700 medical workers.

The last time this indicator did not work was 1980 In nine of the last nine and 20 of the last 23 presidential elections, if the S&P was up three months leading into the election, the incumbent was reelected. 1980? Reagan’s landslide.

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Tags Politics . Equity . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Investments in real estate investment trusts (“REITs”) involve special risks associated with an investment in real estate, such as limited liquidity and interest rate risks.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Institute of Supply Management (ISM) nonmanufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

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