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The Election & The Market

This year has been peculiar to say the least. A pandemic that started more or less in January killed more than a million people and is now on the cusp of a second wave across the globe. In late spring, we experienced nationwide protests against police brutality and racism that ultimately spread around the globe. Then riots captured our attention. Now we come to fall where we have, as you may have heard, likely the most important American election in the past 50 years. It may decide who the next Supreme Court Justice is. It obviously can flip the executive branch, but even more importantly,it may also flip the senate, resulting in the “blue wave” many political strategists have predicted (more on this later). Polls and statistical forecasting have misled us before though (2016, anyone?).

All the uncertainty and bad news have gotten to me, I must say. As someone who grew up in the 90s, I don’t recall many horrible generation-defining moments I experienced until we broke a new millennium. Now, when a boomer says something to the effect of Your generation is so spoiled, in my day we worked hard for what we got; you have it so easy I take guilty pleasure in the verbal opportunity to obliterate them. From 2001 to today, in my opinion, we have had at least five generation-defining events in less than 20 years:

  1. The September 11th Terrorist Attacks
  2. Two Middle East Wars, which eventually laid the foundation for the birth of ISIS
  3. The Great Recession of 2008
  4. The polarizing election and presidency of Donald Trump, and now
  5. The Covid-19 Pandemic

I sometimes look to dark humor to get me through the worst, and right now the market is also looking for something (aka a stimulus package) to get through these dire times. The CARES act passed in April, although supermassive at over $2 trillion, was just not enough. Even when it originally passed, Secretary Mnuchin voiced that we would need another stimulus package soon – potentially an even bigger one. The economic effects of the pandemic remain, and we simply cannot survive – economically or health-wise – without more government assistance.

This is part of what makes Trump’s latest declaration regarding no stimulus package until after the election so bizarre. The man might be impulsive, but I do try to remain objective when attempting to understand his moves. This one is the most perplexing, which is probably why he reversed his tune in less than 8 hours:

As far as things we know with the highest confidence, we are pretty sure Trump cares about the economy, or at least the perception of the economy (read: stock market). Pre-pandemic, he consistently tweeted about how high stock market gains were under his presidency, and he was explicitly critical of Federal Reserve Chair Jerome Powell for increasing short-term rates, not because it would hurt the economy (it was actually good for it at the time), but because it could lead to declines in the stock market. As an aside, if you didn’t already know, the stock market and the economy are different animals.

Again, this is what made this particular tweet so puzzling to me. For someone sitting at the height of the U.S. political universe, and supposedly keen when it comes to political strategy and manipulation, how could he not have seen the political disaster he created? In my mind, the easy play was to push for more stimulus in the media, but in reality, keep talks on a stranglehold behind the scenes and, when the media does question why it hasn’t happened yet, just blame the Democrats. It’s a tried-and-true strategy using deflection and withholding of the truth, which has, to be fair, been utilized by both parties in the past.

But Trump didn’t do that here. He explicitly stated that no stimulus talks would happen until “after he wins the election”. The Democrats didn’t even need to point the finger who is politicizing the pandemic and playing with people’s lives. The president did it himself for everyone to see. 

And the market took notice. 

The tweet and confirmation from Mnuchin that the president had ordered no further stimulus talks was late afternoon on Tuesday, October 6th. When the news broke, the market fell 2.21% pretty much immediately:

Graph of S&P 500, October 6-7, 2020  Source: Bloomberg

Just hours later, perhaps once Trump’s advisors informed him what he single-handedly did to the stock market, he reversed course. By Tuesday Night, he was conspicuously tweeting about stimulus checks directly to Americans, and, as you can see per the chart above, the market went back up to its previous level by Wednesday morning. I suppose one can assume mission accomplished if in Trump’s camp. 

This brings us to the forefront of the matter. In a few weeks, all the anticipation of 2020, at least politically-speaking, should come to an end. I tend to believe the risk of Trump actually fighting the election results is pretty low. He’s slowly becoming a one-man wolf-pack, the probability for the rest of the Republican Party backing such a dramatic move and jeopardizing losing generations of voters is just too high. And his backing is not just falling in his own party, even his own son reportedly wanted a “family intervention” to stop his “crazy behavior” at Walter Reed Medical Center.

With Joe Biden leading in multiple national polls by increasing margins over the past few weeks, the debacle that was the first debate, and Trump’s contraction of the coronavirus and related belittling of the disease compromising his constituency among seniors, it appears the blue wave is a powerful reality waiting to come to fruition. Yes, it is possible Biden could win but not also get the senate. I for one am intrigued as to what the distribution is of voters who actually individually select each candidate for office at the polls, as opposed to just taking the red or blue ticket. Such data would be extremely telling for this election.

But this is more of a tangent. For now, let us assume, for better or worse, that the Senate flips as well as the Presidency (again, this is what the polls are indicating). What this means for the market, is not necessarily confined to a binary outcome of pure bullish or bearish. In my opinion, what it does mean is more stability and certainty, which the market will definitely welcome.

You probably have already heard that if the Blue Wave occurs, it makes a second stimulus much more plausible and likely faster. I believe this is 100% accurate. With all three branches of government under one party, the potential for any holdup is much lower and enhances the ability for our government to pass legislation (can you believe it!?).

Taxes

Yes, the market is worried about tax increases. It could be from the Capital Gains increase variety, or increasing the corporate tax rate, which Trump fought so vehemently to lower. I don’t anticipate a tax increase as horrible as some do for the market for several reasons:

The Tax Cuts and Jobs Act of 2017 lowered the corporate tax rate from 35% to 21%. This was a massive change of 14% lower, or a 40% decrease. Biden is extremely unlikely to go back to the original 35%. The entire reason the party backed him is because of his “middleness”. If the party wanted to go back to 35%, they arguably would not have undercut fellow nominee Bernie Sanders the way they did for the past two election cycles, and would have used his base to propel such changes. The more likely scenario is somewhere in the middle – if it happens- to ~26%. This would still be lower than before the Trump tax cut, make the U.S. still competitive on a global basis regarding taxes, and would score the political points necessary to retain the Democrats’ constituency. It also would lower the government deficit.

Tax increases (or cuts) are also one-time adjustments to stocks. They are not permanent. In other words, if corporate taxes do go up, even back to 35%, the market would adjust with say a 10% correction. The stock market would not continuously spiral out of control until the end of time. This is math at this point, not sentiment.

Trade

I must say I was intrigued to write about trade because the media as well as the market appear to have forgotten about this issue. To be fair, it has been in favor of more important things like a pandemic and the presidential election of the most powerful country in the world. The market would definitely welcome more certainty regarding trade talks with the EU and obviously China. I also look forward to not seeing six headlines about Trump Tweets and China every morning and the market hopelessly trying to price in each and every possible move. No, if the dem’s win, all of the Trump Tariffs would likely be eliminated, and global trade would likely revert to pre-Trump or even better. This has to be bullish for stocks and the domestic economy, in my opinion.

Market Segment

Much of the research thus far regarding potential winners and losers – in terms of industry – if there is a blue wave implies renewable energy and cannabis stocks could go up, while tech stocks could get targeted for regulation and generally would be bearish. I disagree that Tech would go down for a couple of reasons – one, admittedly, is more of a personal hunch, the other a more precedent-based rationale.

            First, my personal hunch. If you don’t know Kamala Harris’s background, she’s as west coast and Bay Area as it gets, which means she generally likes Tech. She was born in Oakland, served as District Attorney for San Francisco in 2003 and Attorney General of California in 2010 and again in 2014.  She was then elected a U.S. Senator from California in 2016. Her brother-in-law is also Tony West, the General Counsel of Uber. Not to put too fine a point on it, she has received countless donations from Silicon Valley’s elite in all of her previous elections. The idea that the Dems are fixated on breaking up Tech and would choose Kamala as VP is just tough to marry. And given her Justice Department background, it seems unlikely she would not have a say in DOJ appointments, who may or may not want to target Tech.

The more “rational” argument is behemoth companies like Amazon have existed before and survived the onslaught of attempted regulation. Microsoft did, and more comparable to Amazon, Wal-Mart has never been regulated, and has annual revenues of $500 Billion this year, dwarfing Amazon’s $330 Billion. If Wal-Mart can avoid the deregulation train, which has always paid minimum wage and provides no worker-benefits, I would guess that the economic argument to regulate Amazon would also fail. Amazon increased its wages for warehouse workers on its own and provides benefits and 401ks for its people. I will disclose I own Amazon and generally am a Jeff Bezos fan (anyone who survives Wall Street and has the cajones to leave to start their own gig is awesome to me). Plus, in the current pandemic context, many people have grown fond of Amazon and its ever-quickening delivery capabilities, of course, that excludes any potential socialist contingent that probably wants to see him crucified at the Super Bowl halftime show.

No, the difference is Amazon is a tech company, and that is a buzzword currently. But buzzwords are hardly sufficient to reshape entire industries and breakup successful corporations that employ literally over 1 million people.

So, is the blue wave guaranteed? No. And would the blue wave be as horrible for the stock market as some people might profess? Probably not. In fact, the blue wave would actually be a wave of stability (forgive my corniness), and the market generally prefers certainty and predictability over childish tweets. For reference, ±1% daily moves in the S&P 500 is not normal. It just has been in 2020.

I imagine most of Wall Street doesn’t want that to be a permanent fixture.

Photo credit: https://www.ai-cio.com/news/stock-market-will-forecast-wins-white-house-2020/

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