trading places

• The October story in markets has been one of worry over the perception of tightening polls in the Presidential Election, making investors fear a repeat of 2016; the S&P 500 declined nearly 3% as there is a perception that anything short of a Democratic sweep will result in a less than satisfactory fiscal package as well as further mismanagement of the Covid pandemic. Additionally, these jitters managed to halt the relentless run in Soybeans – as well as in the insanely hot solar stocks as the TAN ETF rose an astonishing 215% since the March lows as the market discounted higher probabilities of a Democratic win in November.

• It is remarkable that after all this, the average American still perceives Trump as being better on the economy while having more trust in Biden on handling the pandemic. This completely misses the reality that a catastrophic pandemic that brings labor to a halt is very much the essence of managing an economy; in other words, the basics of an effectively run economy start with ensuring that the utilization of the factors of production can be maximized.

• As we have come closer to Election Day, pundits have taken to forecasting another unexpected Trump win in a shameless bid to be seen as a genius after the fact by correctly predicting the impossible. While it is certainly possible that Trump wins re-election, that idea is not at all supported by poll data nor is it evident in what will certainly be close to a 100-year record turnout for US presidential elections.

• Indeed I find it nearly delusional to believe that, for instance, early voting in Texas this year surpassing total voting in 2016 is due to white Cheeto fanboys coming out even stronger and not due to blacks and Latinos having become more engaged as they’ve experienced how much worse four more years of Trump can make their lives once he has no re-election to worry about.

• Moving onto the polls, one of my favorite commentators on the economy makes some excellent points on predicting the outcome of the election. For example, given the sharp downturn in the economy, it is all but impossible that Trump wins the popular vote, which in turn will make the task of winning the Electoral College much more difficult. Indeed, all lost re-elections in the 20th century have been preceded by a significant spike in unemployment. If we are to assume that polls represent a nowcast and given that we are so close to Election Day they are likely less than 1 ppt off from the result of the final vote – and this is underpinned by the nearly 100 million early ballots that have already been cast – it stands to reason that the more likely 2020 election surprise, if we are to have one, is a Biden landslide.

• This strikes me as a reasonable outcome, especially given that Trump did not manage to achieve approval ratings above 50% a single time during the four years he spent in office. Not only has there been a president re-elected with persistently low approval ratings, no other president in modern history has managed to be have majority disapproval throughout an entire term.

• Much has been made of the delays the increased mail-in voting may cause in producing results, but if the Biden landslide scenario materializes then there is also a significant probability that Trump will get his wish and know the outcome on Tuesday night. Should it turnout to be a close election or a Trump win, then we will likely have to wait until Saturday morning for the results as Pennsylvania will most likely be the deciding state.

• Adapting the above assumptions to the Senate race, it seems most likely that the Democrats will also win back the Senate with 51 or 52 seats. A slim majority, but with Democrats set to keep their control of the House, if not add to it, this will be more than enough to end the partisan gridlock that has had a significant effect in adding volatility to markets over the past two years.

• It is more likely that we have a Democratic sweep, notwithstanding any Trump election shenanigans as he desperately attempts to avoid the loser label on the biggest national stage. The portfolio implications are clear: an unchallenged Democratic sweep is likely to see a quick stabilization of equity markets with themes such as clean energy outperforming. On the other hand, a Trump win or perhaps even anything less than a Democratic sweep ought to see continued higher volatility, though the post-election certainty, regardless of the ultimate results, ought to calm markets somewhat. A contested election may see volatility through January depending on how markets perceive the likelihood of a Trump challenge succeeding.

Tags: #USElection2020 #politics #markets #investing #trading #covid19