As we draw to the final week before the U..S presidential election for 2020, it seems the market is starting to get a bit more jittery. After all, the theme for the last two weeks has been a near certain Biden win and a Democratic sweep. The market is obsessed with only one thing right now, a fiscal stimulus deal and government going on a spending spree which will revive the economy into Q4. If that were to happen, then it is clear which stocks will be the winners - the lagging "value" stocks that have underperformed all year. That has been the theme of late as there has been vicious sector rotation out of Technology, Gold, and Silver, into likes of Banks, Industrials, and cyclically sensitive names like Copper. But over the weekend something changed. The odds of a Democratic sweep and Biden win do not seem that much of a done deal according to the new polling.
Regardless of who wins, both candidates want the same thing, to get the U.S. economy back up and running in full steam but using different approaches. Trump wants to cut payroll taxes and focus on regulation. Biden wants to increase government spending offset by increasing high net worth taxes. It is almost certain that with a Democratic nominee there will be an even higher U.S. debt percent of GDP as they will focus on infrastructure spending and push for a $2.2+ trillion deal. This is why the dollar had been falling last two weeks and "value" stocks outperforming as hedge funds rotate out of the year to date winners like Technology, Gold, and Silver into the laggards - the spread over the past few years is just so wide.
Over the weekend polls showed Trump gaining popularity over the battleground states. What most do not realize that the U.S. election has nothing to do with the national "popular" vote. Biden could get a majority and still lose. It all comes down to the Electoral College vote and one candidate has to gain 270 votes to claim victory. Certain states have more votes than others and the battleground states hold the key - 56 votes that can swing the election either way.
The market is all one big macro trade right now. Either you believe in a Biden victory, and then a full fiscal stimulus deal which means the dollar collapses, U.S. bond yields squeeze higher and all cyclically sensitive names "value" start rallying hard into year end. Alternatively, there is a lower amount or even a delay in the deal and the dollar rallies, and all defensive stocks like Technology rally as U.S. bond yields fall back down. This is what the market will be yo-yoing between over the next week or so till there is a clear verdict. This is the simplistic way the market is viewing the two possible outcomes for row. There is the added layer of complexity with a Biden win and a GOP Senate which has deflationary implications as well. A gridlock of any sort will not be market positive as we all know the Senate will do what it can to block the winner if it is not a clean sweep.
The market won't tell you which way it will go, but it is important to look at positioning and assess the asymmetric risks right now. For one, U.S. bonds are at record shorts given the near record short positioning, which is logical given inflation is going to be an issue going forward. But if there's any chance of a delay in fiscal stimulus, we already know the U.S. economy is running out of juice, and that can get U.S. bonds to rally quite hard given every one does not expect it. Also, the dollar positioning is massively short, as that too is expected to be a no-brainer (falling), so any rallies there can and will catch a lot out as they are not positioned for it.
Be nimble, keep some powder dry, and pick your favorite stocks and sectors based on earnings growth, and demand vs. supply fundamentals looking past November. This will be a volatile week but be aware of the positioning pitfalls that can cause hiccups along the way.
