“The S&P 500 equal-weighted index had one of the largest daily outperformances since the GFC”, Goldman’s Alessio Rizzi wrote, in a Tuesday note recapping the market’s reaction to news of Donald Trump’s COVID-19 diagnosis late last week.
He went on to point to the same outperformance in small-caps and value flagged here on Monday.
While Joe Biden extended his lead in the polls following last month’s farcical debate, markets have seemingly begun to price in much higher odds of a blue sweep, quite possibly because it is now very hard to argue with the contention that the ceremony for Amy Coney Barrett’s SCOTUS nomination was a mini-super-spreader event.
In addition to Trump, a trio of GOP senators, Chris Christie, the president of Notre Dame, the first lady, and, as of Monday, Kayleigh McEnany, all tested positive.
The lack of masks and social distancing at the event, and subsequent infections for attendees, is an indictment of the administration’s approach to the handling of the virus. Some voters will undoubtedly see it as a microcosm of the president’s national strategy, which echoes that adopted to disastrous effect by Jair Bolsonaro in Brazil.
All of that said, the near-term challenge was disentangling trades aimed at fading Trump’s electoral fortunes with the increased probability of fiscal stimulus under any political scenario. I say “was” because the mercurial president called off stimulus talks on Tuesday afternoon in a fairly dramatic about-face.
The price action on Friday, and especially on Monday, was consistent with rising odds of another virus relief package. That is a guarantee under a Democratic sweep scenario, and Trump made it clear over the weekend that he too was prepared to essentially demand more stimulus from Mitch McConnell.
So, some of what you saw in rates (and on the sector/style side in equities) could have reflected stimulus bets rather than market participants fading Trump. Obviously, things changed after the president’s decision to kill stimulus talks until after the election.
Goldman’s Rizzi reiterated several themes from the bank’s recent commentary around the election, including the notion that markets will likely have enough information to trade a winner on election night even if the “official” result is delayed. He also recapped the bank’s contention that Fed hikes would likely be back in play sooner under a Biden administration and a Democratic sweep.
As far as what usually happens in and around elections, Goldman noted that “stocks [have] generally performed well in the week ahead of the election and poorly in the week after, while volatility has generally declined”.
That table from Goldman isn’t exactly amenable to a quick read, but it is useful if you’re willing to spend a few minutes parsing it.
When it comes to the dollar, Rizzi noted that “with a Biden victory, the USD is likely to depreciate for three reasons:
(1) a potential US corporate tax hike would make US Equity less attractive; (2) large fiscal stimulus with a dovish Fed would also likely weaken; and (3) foreign policy under a Biden administration should lower the risk premia in some currencies, especially the Chinese Yuan.
The dollar was on the back foot Monday and while it’s certainly possible that the greenback could find its footing in the presence of a quick back-up in US yields and/or a renewed bout of risk-off sentiment (despite those two things not really being consistent), higher breakevens and buoyant equities along with a steepening curve are all indicative of the market pricing in stimulus.
Stimulus means wider deficits and more spending. That is dollar negative in the current conjuncture, although I would caution that betting against the greenback based on the purported long-term “structural” bear case (twin deficits, etc.) hasn’t always panned out. On Tuesday afternoon, the dollar knee-jerked higher when Trump tweeted his opposition to Nancy Pelosi’s stimulus proposal.
As far as Goldman’s outlook for stocks in a Biden win, it hasn’t changed. “Our US Equity strategists expect the Biden proposal could have a modestly net positive impact on S&P 500 profit in the near-term and net negative longer-term”, Rizzi wrote Tuesday, adding that “for this reason, the largest opportunities are within equity, with cyclicals likely to outperform defensives, value to outperform growth [and] non-US Equity [possibly] benefitt[ing] given it’s not exposed to tax hike risk [and] would benefit from a larger pick-up in global growth”.