Over the last week, the narrative of a Biden presidential win seems to have changed a bit.
The market is cheering those prospects with implications of a much higher fiscal stimulus to come, which would be much more market friendly, offsetting the tax increases Biden promises to enact if he were to be elected. Meanwhile, the U.S. dollar, after its recent rally in September, it is now starting to fall as the prospects of a deal become clearer.
With that, investors and portfolio managers are chasing the economically sensitive names and sectors such as energy, financials, industrials (e.g. value) and selling out of technology (e.g. growth) names. This shift out of growth into value has been the hot debate across various trading desks, given the huge divergence that has emerged between the two. But what has really happened?
Since September, this relative trade has really gone nowhere. Other than a few days of violent rotation out of one into the other, the net effect has been muted and not really made any headway. Excited cheers aside, if one were to do a price graph going back two months, there really has been no change.
There are two schools of thought here. If you believe that a fiscal deal is going to be passed soon, then of course most hedge funds and portfolios will rotate some capital out of technology, which has been the leader for the past year, and allocate some into bombed-out names such as banks and energy. On a six-month+ horizon this may make sense, especially if one is trying to lock in gains from over the past two years. But it may still be a huge opportunity cost for tactical investors as they could be three months too early.
It doesn't really matter who is elected president, as a fiscal deal is going to be passed. The U.S. economy needs it, and it cannot recover and grow without it. Even Federal Reserve Chair Jerome Powell said this, in effect pleading Congress to do something on the fiscal side as the central bank has got its hands tied on the monetary side. The Fed's balance sheet is bloated at $7 trillion and no matter how much it prints, it cannot stimulate growth and the economy, it can only sustain asset prices and buy time.
But the pleas are falling on deaf ears as neither party is interested in helping the economy or the people, they are only interested in winning the election and picking on each other like kindergarten kids.
After the initial lockdown re-opening, U.S. economic data was very strong as it was coming from absolute zero levels. Of course it was V-shaped. However, over the past month or so, the data is showing signs of stalling, slowing down. The economy is running out of juice and needs another boost, unemployment checks and more job growth. Without this the U.S. consumer cannot spend and companies cannot grow.
The longer we wait to get a fiscal deal, the more of a growth shock we will get going into the election. Markets do not like uncertainty and it is at a bit of an inflection point. For now, it is just shifting its preference between two groups of stocks. The broader top-line index is really not making any headway for now.
October can be a tricky month. But all asset classes are linked to U.S. dollar right now. Deal or no deal, the dollar will fall or rally. The answer to those questions will dictate your asset and stock allocation.
Charts will not tell you where the market can go, only where it can get to once the direction is set. Still, one has to take a view. Be in the growth camp or the deflation, slowdown camp. Since, it is only a matter of when, not if a fiscal deal will be done, the question is will it be here or 10% lower?
If you have a view, run with it, but be prepared to withstand the volatility, especially if your stocks move down 15% before moving higher 20%. Then again, no one really doubles down on a position when it is 15% against you, do they?
