Pumpkin spice popcorn ... m'm, m'm, m'm
The race could tighten but whatever happens, the market should be fine.
I enjoyed it while watching what surely will be President Trump’s last debate ever (a gift from my liberal friend, something about the color orange). National polls really don’t tell us a lot about the potential winner—it’s all about the Electoral College. By that count, the RealClearPolitics (RCP) average of battleground state polls shows Biden with a 4.1% lead compared to Clinton’s 3.8% lead at this point in 2016. That seemingly is a minor difference, although unlike four years ago, this polling gap has been relatively consistent. It doesn’t help Trump that he has a relatively low job approval rating, a slightly worse favorability rating and the yoke of incumbency around his neck—late-deciders and independents tend to break toward the challenger. Cowen still sees some big variables that could spell another Trump surprise: whether Texas drop boxes or removing former Florida felons from voting rolls, voting process challenges are a huge variable. Perhaps the biggest is the high percentage of absentee ballots being rejected (the Pennsylvania "naked ballot"—forgetting to put the completed ballot inside a secrecy envelope before enclosing it in the official mail-in envelope—could be this year’s “hanging chad.’’) When Democrats curtailed door-to-door registration due to the pandemic, their party numbers suffered as the GOP continued to canvass, making strides in key states. Noting Trump's RCP average job approval is 44.8% vs. 50.5% on the economy, Cowen wonders if the 570 basis-point differential represents the so-called “shy” Trump voter? The sheer magnitude of early voting appears to favor the Dems, but betting odds dipped below 60% over the past weekend, before ticking up again, and the gap between them and polls is much wider than in 2016. Hmm. What flavor popcorn for election night?? While Trump performed much better in last night's debate—Washington Analysis thought he won and Cornerstone Macro remarked it was Trump’s best performance in his five years of debating—the problem for him is nearly 50 million people already had voted before the debate, vs. 129 million people who voted for all of 2016. So even if his numbers rise a bit over the next few days, the potential impact likely is limited. The bigger beneficiaries may be Republican down-ballot candidates who find themselves in tight races in swing states.
If it’s Biden and the Dems, the consensus that they wouldn’t pass a tax increase next year amid a recovery is wishful thinking, in Cornerstone’s view. Candidate Biden keeps promising to pass his tax hikes right away, and Kamala Harris said in the VP debate that Democrats are going to reverse the Trump tax cuts on “day one.” Every recent president sought (and almost all of them succeeded) to pass his economic agenda in his first year in office when he had the political momentum and the votes to do so. Investors appear to think Biden would hold off on corporate tax hikes that would reverse half of Trump’s 2018 reduction but may act on increases aimed at higher-income individuals—his plan would push the capital gains rate to 39.6%, the second-highest ever and the largest jump on record. It is not even debatable that the agenda Biden has proposed is, by far, the most liberal agenda any Democratic nominee for president has run on in at least 40 years, Cornerstone says. It would represent the biggest shift in public policy that any nominee of either party has proposed since Ronald Reagan in 1980. Whether Trump or Biden, stocks appear to be looking past the election to a lot positives in 2021: an economy early in recovery, virtually unlimited central bank support, more fiscal stimulus on the way (more below) and a bullish earnings outlook—the current 2021 S&P 500 earnings-per-share estimate is $166, above record results posted during the economically robust years of 2018 and 2019. Indeed, copper prices at multiyear highs, a 10-year Treasury yield that has broken above its 200-day moving average resistance for the first time since 2018 and small caps that have outperformed large caps of late are representative of this firming risk-on tone.
The biggest election worry appears to be the potential for a drawn-out contested election, which helps explain why the VIX remains elevated. But the latest Evercore ISI investor survey indicated the biggest concerns are actually centered on Covid-related issues. The Covid fight we’re waging now is a lot different than in the spring. While cases have increased exponentially in Europe since mid-July and are hitting new highs in many U.S. states, restrictions are milder, reflecting the enormous economic costs of the March/April shutdowns and the fact this wave is experiencing far fewer hospitalizations and deaths. The world's cumulative case fatality rate from Covid-19 has fallen from above 7% in late April to 1.85%, and with testing at an all-time high, the test-positivity ratio is near all-time lows. BCA Research says the virus is having a hard time coming back given some level of immunity and, now, a high level of expertise in stopping and treating it. Still, UBS says 13 of 43 economies upped restrictions last week while three lowered them—the highest net increases since April. Europe’s new wave has raised doubts about 2021 forecasts for it to grow faster than the U.S., where financing conditions have eased more and fiscal stimulus has been larger and more direct. More could be on the way. Worries over the impact of the recent resurgence in Covid cases has expectations for a massive package by the end of January, ranging from $1.8 trillion (if Trump wins) to $3 trillion+ (if there’s a Blue Wave). This, along with the uber, uber, uber-dovish Fed, means the market should be just fine. Now, a vaccine, please!
- Everyone is talking about housing After slogging along for a decade in the wake of the mortgage-driven global financial crisis, the industry is on a roll thanks to record low mortgage rates, tight supplies and rising demand. This week, existing home sales jumped to a 14-year high, single-family starts hit their highest level since June 2007 and builder confidence set a new record.
- In the end, it’s all about jobs With California reporting after a two week lull to ferret out fraud, the latest jobless claims surprised, falling to their early March levels. Notably, continuing claims plunged, which is very good news as it workers are moving back into the labor force. The two reports dropped the implied unemployment rate to 6.2%.
- More “V” indicators Conference Board leading indicators rose more than expected and for a fifth straight month in September, while Markit’s initial take on October showed both manufacturing and services activity accelerating to 1.5-year highs.
- Most people I know are still working from home While the Architecture Billings Index rose in September to its best reading since February, it remained in contraction territory as demand for design services contracted. Still, its 3-month average has been rising since its May trough, aided by a pickup in multifamily residential activity.
- One business’s pain is another’s gain Chapter 11 bankruptcy filings soared in Q2 and Q3 to an 8-year high. On the other hand, business applications jumped this month at nearly their fastest pace since 2013, indicating the process of creative destruction is fully underway in this crisis.
- Covid’s steep long-term cost The International Monetary Fund says close to 90 million people are expected to fall into extreme deprivation this year alone (defined as those living on less than $1.90 per day.) The cumulative loss in output relative to the pre-pandemic projected path is projected to grow from $11 trillion over 2020-21 to $28 trillion over 2020-25.
Remember slide rules? Bank of America shares that we will create as much data in the next two days as we did since the dawn of civilization through to 2000; there has been a 1-trillion-fold increase in computing performance over the past 60 years; and the computing power of 1 exaFLOP (one quintillion operations per second) is equivalent to every human on Earth doing a calculation per second for 4 years.
China, our biggest adversary? The Big Mac Index, the Economist’s simple gauge of a country’s prosperity, finds a Chinese consumer can buy an entire Big Mac in Beijing for the equivalent of $3 in the U.S. By the same gauge, if he converted his renminbi into dollars, he could only buy half a Big Mac in the U.S. In other words, when buying most products, the Chinese get almost twice as much bang for the buck than Americans do. China will be the only major country to post positive growth this year as it continues to transition to consumer, finance, health care, tech and Green energy industries to drive its economy.
Planes are safe, boss; may I travel again? Thanks to strict Covid protocols, airline passengers are 20 times less likely to encounter infected persons while flying than while walking the streets, according to Fundstrat. Other areas that it says studies found to be less risky due to protective measures: professional sports, schools, restaurants, subways, casinos, grocery and retail stores, beaches and mass protests. The worst? Bars, nursing homes, homeless shelters, prisons, choir practice, vaping and huge weddings.