In a note out late last week, JPMorgan’s Nikolaos Panigirtzoglou suggested that the market’s obsession with fiscal stimulus notwithstanding, it’s still all about central bank liquidity provision.
“The upside for equities over the medium to longer term depends more on debt and liquidity creation and thus central bank QE than on fiscal stimulus,” he wrote.
To be sure, Panigirtzoglou didn’t say the fiscal impulse doesn’t matter. It’s just that, in his view, it matters more for the extent to which it will help determine whether the “equity bull market would encompass value and traditional cyclical sectors or continue to be more narrowly focused on high quality and growth oriented stocks.” In other words, it matters more for the character of the assumed rally than it does for the direction of equities as an asset class.
For those of you inclined to take a similar view, it’s worth noting that Jefferies’ David Zervos also flags Fed policy as perhaps the key determinant in the near-term irrespective of the election outcome.
Zervos cites “a dovish Fed backstop under any election scenario,” noting that “while there is plenty of potential for rotation within spoos, for the aggregate levels of risk asset and IG credit markets, a highly dovish Fed backstop will be the driver no matter who takes the helm of the White House or control of the Senate.”
Again, it’s the “aggregate levels” bit that’s important. While there’s obviously quite a bit of dispersion under the proverbial hood (both in equities and credit), the 30,000-foot view is a kind of “like it never happened” situation.
That’s in no small part attributable to the Fed’s explicit backstop for corporate credit and, of course, the implicit backstop for equities.
But Zervos doesn’t think every conceivable election outcome will be a total non-event — or at least not looking out over the next year or more. “There is more risk in the longer term from a ‘blue wave,’ due to the potential for increased debt-financed stimulus and the concentration of power,” he said.
As ever, I have to restrain myself from delving into semantics — US Treasurys are not really “debt.” And you don’t have to be an MMT advocate to understand that. It’s more of a philosophical thing. You cannot properly be said to “owe” a sum that is denominated in a currency that you issue. We can all argue about the long-term inflation repercussions (indeed, we can all argue about any number of points when it comes to viewing the world through an MMT lens) but it makes no more sense to say the US “owes” anyone dollars than it does to say that you “owe” debt denominated in your own saliva. Your saliva may not be worth anything, but assuming you owed it to someone and you didn’t suffer from chronic dry mouth, your ability to pay could not be called into question.
Anyway, pulling quickly away from that tangent, note that in the week through October 27, specs ramped up bullish S&P bets to the highest in years.
I’m everywhere and always cautious about overinterpreting positioning data, and you should be too. I present that chart as is. Stocks obviously tumbled on Wednesday and Friday following the period covered by the latest data. US equities have fallen for two consecutive months.
“Some strategists argue the S&P 500 can make a run higher from next year, helped by post-election progress on government aid to combat the pandemic’s economic fallout, as well as the introduction of treatments and vaccines,” Bloomberg wrote Monday, in some boilerplate copy accompanying their own presentation of the same chart.
When it comes to the post-election trade, Jefferies’ Zervos said that “if risk markets want to ramp up sharply on a blue wave, I would fade it, and if risk markets want to freak out on a contested election or divided outcome, I would buy a decent-sized dip.”
“I would” guarantee you that markets will, in fact, “freak out” in a sufficiently adversarial contested outcome. You can make your own call on whether any such “freak out” would be an opportunity. As noted here on Sunday, if things were to go awry in earnest (where that means there’s widespread social unrest and/or volatility surges on expectations for some kind of “science fiction” scenario at 1600 Penn.), the Fed would likely need to flood the market with liquidity. So, your “backstop” would be there, assuming you believe that’s enough to pacify traders and investors in an adverse election situation.
Ultimately, Zervos muses that “the market may not move very much and this election could be the financial markets’ non-event of the century.”
Fingers crossed. Seriously: Fingers crossed.