bonds stocks volatility

The Day The Earth Stood Still

Donald Trump appeared poised to put up a legal fight in the event some combination of electoral outcomes results in a Joe Biden victory. But markets had seemingly already looked beyond the presidency.

You might be inclined to simply suggest that “stocks will be stocks,” but there is little question about the following: The character of the price action on Wednesday made it abundantly clear that the market was excited about a material reduction in the odds of i) higher taxes and ii) a more onerous regulatory environment.

At the same time, the notion that a GOP-controlled Senate will serve as a speed limit on stimulus catalyzed dramatic outperformance from growth and momentum names at the expense of pro-cyclical plays that would have benefited from a sea change in the way US lawmakers approach fiscal policy.

Assumptions about a more subdued fiscal impulse, more Fed easing, slower growth, and less borrowing, drove long-end yields sharply lower. Last week was the worst week for a simple stock/bond ETF portfolio since March. This week, by contrast, is shaping up to be a blockbuster.

“For fiscal policy, Senate control is at least as important as the White House. Under a narrow Republican Senate majority, we would expect no major tax increases but also a fiscal stimulus package of less than $1 trillion,” Goldman’s Alec Phillips said Wednesday.

Phillips went on to note that the odds of the filibuster being eliminated are now very low. That  “reduces regulatory risks that would be particularly relevant for certain sectors of the equity market, and leaves more incremental differences in regulation dependent on White House control,” he added.

When you think about the above, a good quick take is just that Biden can tone down the trade war, but a tax hike would be a heavier lift. “If a capital gains tax isn’t going to be increased, all those investors waiting to take chips off the table in their tech positions are now saying, ‘You know what, I’ll hold on,'” Miller Tabak’s Matt Maley told Bloomberg by phone.

At the same time, reduced regulatory risk could help the tech titans, although I’d note there’s bipartisan support for cracking down on Silicon Valley. So, that horse may have already left the barn, as it were.

Note that the yuan surged the most since last December’s trade drama, rising some 0.9% against the greenback.

Gold fell and the dollar was weaker as markets begin to ponder the prospect of a Fed that’s forced into even more aggressive accommodation now that the fiscal side looks poised to be hamstrung by a recalcitrant Senate.

“The polls were wrong, again. Markets wait for clarity, but I still believe the Fed matters more for the dollar than who lives in the White House,” SocGen’s Kit Juckes remarked. “Less fiscal easing than would otherwise have been the case [means] continued dependence on the Fed to prop up the economy for longer,” he added.

As far as what’s next for stocks, the truth is, it’s anyone’s guess. Donald Trump said all manner of outlandish things over the 12 hours from his “victory” press conference through afternoon trading in the US, but nothing that would indicate he’s pondering some kind of “science fiction” move. Perhaps that’s just because he wants to try the courts first, being the litigious individual that he is.

On the technical/quantitative/flows side, it’s worth noting that vol of vol moved sharply lower on the day.

There’s a sense out there that to the extent divided government and gridlock means more Fed easing, there’s no reason to expect equities (as an asset class, anyway, ignoring any under-the-hood dispersion) to sell off meaningfully.

Same as it ever was in that regard, I suppose.

Nomura’s McElligott: For Markets, The Presidential Election Is Now Effectively A ‘Red Herring’


9 comments on “The Day The Earth Stood Still

  1. Ria says:

    The market is anticipating not much change- markets like that. Now we can go back to worrying about the course of the virus, vaccines and treatments.

    • runamok says:

      Yeah, COVID, almost forgot.

      We can also get back to worrying about slipping PMIs, slipping employment, slipping personal income, forthcoming layoffs of police and fire personnel, and the oil price war. Get back to worrying whether King Dollar is going to retrace a bit, bolt higher, or gradually droop. Get back to worrying how we are going to employ millions who are going to be displaced by automation. These are much more pedestrian concerns. Less stressful than the last couple of days.

      It’s up to the Fed. I guess the only ticket in town to catch the USD coming out of that funnel is Big Tech and another burst higher in the bond market.

  2. Bay Watch says:

    Can you explain the consensus behind expectations of increasing Fed easing as a result of split Congress? I thought Powell’s messaging over the summer was clear, that fiscal policy needed to drive further stimulus and monetary policy had really run its course.

    Powell was driven to action due to the bond/treasury markets imploding. What will be the market catalyst this time?

    • derek says:

      The idea is that without fiscal help, the economy will dive, forcing the Fed to ride to the rescue again. That will drive another wave of TINA buying.

      With stock prices uncorrelated to the economy and, by extension, corporate earnings, it’s not a stupid bet.

      Until it’s not.

  3. Emptynester says:

    I wonder if the Federal Reserve will develop a digital currency so that they can send money directly to US residents if things get really bad- as a back up plan to total gridlock in DC?

  4. Canuck says:

    Again the witch hunt will be on, how can the polls have been so wrong? The answer may be too simple for high powered analysts to consider. People who were going to vote for Trump were too embarrassed to admit it.

    • Nobody says:

      Nate Silver talked a little about this for 2016 and was clear that actually much of the polling was within the 3-4% margin of error. That said, the “Shy Trump Voter” seems to be a phenomena. Also, I really wonder about how well one can statistically correct for the nature of most polling which is on-line or phone calls. I myself would never respond to either of these, and wonder who in my demographic would be supposedly representing me.

  5. Reading one’s political leanings into election results is curve fitting and likely only serves a purpose to gaslight.

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