economy Markets

Loud Noises, Red Headlines, And Dangerous Drivers

If anything was clear after Wednesday (a questionable prospect, to be sure) it was that the market is just fine with the notion of a stable presidency and a divided government that won’t let the executive get anything done.

In retrospect, I suppose everyone should have seen this coming, although hindsight is always 20/20. Joe Biden’s victory was not assured as of Thursday morning and neither was a GOP Senate majority, but both outcomes were likely. And markets acted as though both were done deals, although it’s worth noting that there was some evidence of a “blue revival” trade late Thursday (the Russell marginally outperforming the Nasdaq 100 for example).

“The ongoing Presidential election outcome sideshow isn’t a story anymore outside of mainstream headline news (LOUD NOISES / RED HEADLINES), because once the Senate didn’t go hard Dem, that was all she wrote from a markets perspective, regardless of court challenges for recounts,” Nomura’s Charlie McElligott said, adding that “what really mattered was the risk of ‘full tilt’ paradigm fiscal shift under a ‘Blue Wave’ of untethered government deficit spending via shock taxation- and issuance- hikes, along with the negatives of the re-regulation of American industry.”

I like the following simple chart, not because there’s anything (at all) profound about it, but because it illustrates key points with indexes (and one ETF) that everyone is familiar with: Tech and duration are back en vogue, the S&P is somewhere in the middle (it is, after all, ~25% FAAMG), and the equal-weighted S&P is the laggard.

That leaves little doubt about how the market interpreted the election results.

A look across performance for market neutral pairs throws things into even starker relief. As McElligott reminds you, “bull-flattening off the back of a downgrade of either growth- and/or inflationary expectations means enormous impacts on Equities market-neutral thematic long-short pairs.”

He lists a hodgepodge of expressions that are, in one way or another, momentum proxies, before noting that Nomura’s “1Y Price Momentum” factor witnessed “an outrageous” +7.5% one-day move post-election.

There are two crucial takeaways from the price action which I think I’ve done a decent job of emphasizing, perhaps to the point of being obsessive. Let’s review them one more time.

First, investors and the C-suite don’t generally care for rampant uncertainty, let alone foreign and domestic policy that careens down the highway at full speed with the driver wearing a blindfold, mashing the gas pedal, and screaming obscenities at a windshield he can’t see.

Second, investors and the C-suite do like lower taxes and less regulation.

With Joe Biden (assuming he wins) highway patrol finally manages to get the raging, blindfolded driver to pull over on the shoulder. He’s then replaced with a person who, while perhaps exhibiting early signs of dementia, is an experienced driver who’s at least capable of operating a motor vehicle safely for another year or two. If there comes a point when he’s not, there’s a passenger ready to take the wheel at a moment’s notice, and whatever you want to say about her, she’s in full possession of her analytical faculties (you might not like the way Harris sometimes chooses to deploy those faculties, but that’s an entirely different discussion).

Meanwhile, a disappointing result for Democrats in Senate (and House, by the way) races represents the installation of guardrails along every exit marked “leftward turn.” The US is thus destined to drive straight down the highway for four years, which is bad news for “change” but good news for business and investors.

That’s really the long and the short of it, with one addendum. The problem with blocking off all exits marked “leftward turn” is that it materially increases the odds of the post-GFC experience repeating, or at least to the extent pretensions to austerity (likely following the next, slimmed-down stimulus bill) will almost invariably lead to more sluggish growth and inflation outcomes.

That, in turn, means placing more of the onus for sustaining the recovery squarely on the shoulders of the Fed.

Here’s a prediction: Three years from now, everyone will blame Jerome Powell (and his colleagues) for exacerbating inequality, keeping rates too low for too long, and inflating financial asset bubbles, without even so much as a mention of the fact that this outcome was preordained when the public once again decided that America isn’t ready for a more modern approach to fiscal policy.


9 comments on “Loud Noises, Red Headlines, And Dangerous Drivers

  1. Uni102 says:

    While there is always a danger in trying to look at market results and imputing rationality to the movements, I wonder if a partial consideration is that a Republican senate won’t increase corporate tax rates. I would think that would be outweighed by the lower likelihood of a meaningful stimulus package. But not everyone sees it the way I do.

    • runamok says:

      If I was a C-suite with a lot of debt and few prospects for growing the top line, I’m not sure I would have taken the Red Senate path. Sure, it’s predictable…now you know you are going to be stuck for years struggling to make sure you have enough cash flow to service your debt. And, depending on the business, little prospect of pricing power. Meanwhile, there is that pool of customers within the 30M unemployed who could have been your customers.

      The C-suite happy now with low taxes, less regulation, and unwilling to take a chance and navigate a dynamic environment with some inflation and the opportunity, at least the opportunity, for pricing power, goes bankrupt.

      Thank goodness for the entrepreneurs in America. For if not for them, and we instead relied on the C-suite for jobs and dynamism, we’d be living in a world akin to a failed, former Soviet block state.

      The C-suite will begging for bailouts from the Red Senate as soon as the bankruptcies begin in earnest.

      A sad reflection on what was once a great nation.

  2. runamok says:

    That last paragraph is hilarious!

    Now we know for sure, for sure, that the Fed has our backs. Prior to this currently unfolding outcome, the next market crash could have been the one that didn’t come back. Now, we know that over the course of the next three years, the Fed will be there to buy all manner of paper, including equity ETFs.

    Stagnation, some inflation, and poor employment numbers, as far as the eye can see, combined with a ratcheting up of the ills that plague our nation. So much to look forward to the next three years…welcome to the 2020s.

    The best we can hope for in three years is that the Fed has a $20T balance sheet.

  3. dayjob says:

    Yep, I was saying before the election that the most dangerous and likely outcome is the one we are seemingly going to get. It’s creates a false sense of security in the market that will create conditions that will play out very poorly over the next year or two and will test the limits of the Fed’s power to keep the economy afloat. Way too many voters who aren’t feeling the pain of the current recession (depression?) believed the gridlock was the best outcome, but you can’t hide the festering wounds on the “real” economy forever.

    I, too, worry that this will create the conditions for a competent autocrat to take the reins by taking the Trump playbook and executing it with discipline. If Trump had half a brain, he could’ve easily toned things down and pretended to care about the coronavirus. There would’ve been no question about another term and possibly more.

  4. Sheldan says:

    H – could you clarify something? An old trope says the stock market does better when the WH and Congress are held by different parties. John Authers says that the market actually prefers party harmony among White House, Senate and the House.

    What’s your take on this issue?

    Thanks for your insight.

  5. Ria says:

    Biden does not have dementia. He was a stutterer as a child, that explains his occassional halting speech or gaffes. I have listened to him enough. Don’t buy Trump’s propaganda on this. It is one more example of projection by the Great Businessman.

  6. John Taylor says:

    day job is right. We – the U.S. and the world – are in a very very dangerous place. Almost 50% of Americans voted for Trump after seeing him in action for 3+ years. Can you imagine voting for an extreme narcissist with psychotic tendencies when there was another choice? If you were an aspiring Salazar, Mussolini, Franco, Putin or Hitler, the American electorate would be very easy pickings.

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