As much fun as a Trump-inspired surge in small business sentiment and a galloping, animal spirits-style rally in cyclicals might be, it’s probably not wrong to suggest the calmest election outcome for markets (setting aside volatility in and around the actual vote, and praying for no violence) is Kamala Harris with split government.
Why? Well, simple: In a Trump loss scenario, aggrieved GOP lawmakers would exact their revenge by blocking anything and everything Democrats try to do on the fiscal side, and what’s behind elevated rates vol right now? Fiscal uncertainty.
As discussed in the October 26 Weekly, Harley Bassman’s MOVE index jumped sharply the day the election entered the one-month expiry window for the options used to calculate the gauge. The figure below shows you the jump on the day the election entered the window.
Again: That’s in no small part a reflection of fiscal concerns, and I think it’s entirely fair to say — particularly given the price action in bonds over the ensuing weeks and the concurrent rise in Trump betting odds — that those concerns primarily centered around a potential “red sweep.”
It goes without saying that there are fiscal concerns (big ones) associated with a “blue sweep” too. I haven’t talked much about those concerns because generally speaking, a “blue sweep” is seen as the least likely outcome, and I don’t want to waste everybody’s time analyzing something that probably won’t happen.
On Monday, Nomura’s Charlie McElligott called the “Harris-Gridlock” scenario “the smoothest glide-path as a vol killer for both equities and rates.” In that outcome, “policy tails [would be] slashed in a way that markets love,” Charlie wrote, noting that split government “means an inability to force through more radical parts of the Democrat economic agenda, certainly relative to the Trump ‘run hot’ fiscal policy mix.”
If you’re the Fed, you don’t want to grapple with a White House that’s hell-bent on growth at any cost with a pliant legislature and an executive with no qualms about weighing in publicly on monetary policy. I’m not trying to be a partisan here — and for heaven’s sake, Jerome Powell’s a lifelong Republican hand-picked by Trump to run the Fed — but can you imagine how vexing a “red sweep” would be for a Fed coming out of a bruising, three-year war with inflation? Every day, you’re waking up to this:
We’re going to be doing fiscal and we’re going to do it very big. Fiscal like nobody’s ever seen before. People say ‘fiscal,’ ‘fiscal, ‘fiscal’ and I asked my generals, I asked them, I said, ‘What happens if you’re in an electric fishing boat and there’s a shark in the water?’ So we’re going to be looking very closely at that, which is why — think of it — you have Jay Powell. He’s a good guy ok? But he failed, he hates this country, ok? Maybe he retires to the bottom of the Potomac, maybe he doesn’t — I wouldn’t mind — but we’re doing fiscal and it’s going to be a great thing for our country.
That’s not an actual Trump quote, but it could be! And that’s the point.
I don’t want to suggest that fiscal policy shouldn’t be leveraged in the service of sustaining the recovery. It plainly should. Indeed, that’s the great lesson from the post-GFC experience: You can’t put it all off on monetary policy, because if you do, you’ll end up with egregious asset price bubbles and spiraling inequality. But it’s fair to suggest that with inflation just now (and not quite) tamed, and with the US economy still performing very well by appearances, it’d be prudent to exercise some measure of restraint if you’re going to “do fiscal.” And if it’s restraint you want — restraint in any context — Trump’s not your guy.
So yeah, if you want things to calm down in bond land, you want “Harris-Gridlock.” And if you like your equities status quo, you want that too. “For stocks, ‘Harris-Gridlock’ is the safe, low-vol bullish outcome for Equities Index” as it’d tip “a resumption of legacy status quo market leadership from mega-cap tech and secular growth,” McElligott went on. (If you like your market plan, you can keep it.)
Charlie also weighed in with what, certainly for a Wall Street strategist, was an incisive take on polling. “People are looking at the updated signs of a sudden lurch in poll ‘herding’ over these final days in the direction of Harris,” he wrote, before asking if this time around it was “Democrats which may have been underestimated as the ‘silent voter.'”
If so, he wrote, it’d suggest pollsters “have been over-compensating for their GOP polling error and evidencing ‘scar tissue’ from the prior two cycles of off-target calls, in turn potentially generating a ‘false optic’ for Trump / GOP Election probabilities along the way.”
I for one would like to hear your take on a blue sweep “something that is not likely to happen”.
Blue sweep = stocks down, bear-steepener, hand-wringing, at least initially.
A blue sweep?
Best guess, Harris, narrow democratic house, gop senate 51/49
But Tester and brown have shots as sheehy and Moreno are not strong senate candidates. There could also be upsets in Nebraska, florida and Texas.
We may be surprised to find a very centrist executive and legislature when it is all tabulated.
And a centrist government even in a “blue” sweep…
Let’s take a look at Wednesday. That’ s the day Election 2028 officially kick’s off for all the “losers” in America. I once had a friend who ran a media operation (newspaper, TV and radio operation in the midwest. He said his company made all of its profit for each four years of its life in the first three months of the fourth year of each four-year election cycle. Now that’s what I call Black Friday.
Folks my age will remember the election of 1948, when the Chicago Daily Tribune proudly proclaimed “Dewey Defeats Truman.” I got to go out and pick that paper off my parents’ porch that morning. A brief educational moment followed.
Harkening back to the recent bipartisan immigration bill which was torpedoed by Trump at the last minute, isn’t there a chance that many GOP reps will be more amenable to compromise and “reaching across the aisle” if the Caudillo of Mara Lago is pushed aside? What will his leverage be then? Threatening to support more extreme candidates in GOP primaries I suppose. But his influence there seemed to be waning as far back as 2022.
On this, possibly the last day of the Republic, the 3Q earnings season stands as follows:
By name and 75% by cap of the S&P500 have reported 3Q, 60% and 69% beat consensus revenues, 77% and 87% beat cons EPS, 49% and 55% saw 4Q revenue cons go up, 34% and 40% saw cons EPS go up, and -0.3% and -0.1% saw stock price go up on reporting (read the negative numbers as 0.3% and 0.1% saw stock price go down on reporting). Feels like a flattish-to-slightly negative quarter for revisions.
At the index level, FY1 (2024) and FY2 (2025) estimates have been pretty flat for awhile, what keeps the N12M estimate going up is the forecasted improvement from 2024 to 2025, which my tracking doesn’t capture but really should.
I find it hard to care, truthfully, until we know if the 1,000 Day Reich is beginning in January.
Sorry, “70%” omitted from start of second para, and the way to read the stock reaction # is that average stock reaction was -0.3% and cap-weighted average -0.1%. Dumb mistakes. I must be distracted by something, can’t imagine what. Maybe I shouldn’t try to oil my FAL and type at the same time 🙂
My small business will be impacted negatively by Trump tariffs, as will my wife’s work in the fashion industry. Any small business owner in America who thinks Trump would be ‘better for business’ probably sells Trump branded merchandise, though most of that garbage comes from overseas. (Hmmmm, I’m betting those goods would find themselves on an exclusionary list from tariffs, anyway.)
Polling: I think the mistakes of 2016 are reversed this time: I’m betting there were plenty of people in red states saying they’re voting for Trump again this time but were just not going to admit out loud that they weren’t going to.
Sadly I think you are correct. Today is my evidence.
Today I was in an ACE hardware, probably the only customer in the store on this rainy day.
Two clerks (old women) were talking about how we needed to elect Trump for President. I as customer chimed in on teh way out the door. “I love our country and do not want the wrong person elected.” They both chimed in but one was particularly boistrous, clearly an orange garbage supporter. She said, ‘yes only Trump can restore us.’
I came back, ‘The orange thing is clearly trying to change our country.’
She said, ‘ I cannot help you.’ Implying that I would be killed in the purge acoming. Yes a death threat.
‘I said you have not been listening to what he said.’ I was out the door.
A death threat from a white haired woman at the ACE checkout.
I thought later, would any co-worker speak out against the Orange with such a mouth listening in?
These threats of purges are likely to create a fearful cadre that will not admit they are voting or have voted for Kamala.