The one certainty you can rely on is that markets react badly to uncertainty!
Uncertainty leads to heightened Fear which alters Investor Sentiment.
As we outlined in this month’s UnderTheLens video, Sentiment controls markets in the short term, Risk in the Intermediate Term and Fundamentals in the Longer Term.
Going into the final stretch of the Presidential campaign and prior to the first Presidential debate, the Biden-Harris ticket was ahead in the RealClearPolitics poll by a commanding 65%, and appeared to have a lock on the election with a “Blue Wave” taking the Presidency, maintaining the House and possibly gaining the Senate. However, a change in sentiment since then is now reflected in the VIX volatility index which has been steadily rising with the gap in election polls narrowing to reflect a closer election.
Uncertainly has increased anxiety while weakened sentiment is taking markets down as we approach next weeks final Presidential vote. Disputed and legally contested results in key battleground states are certain to play a role and dominate the news prior to the December 14th Electoral College voting. With rumors of corruption charges swirling against Joe Biden (and currently being suppressed by the media), it is likely to be break before the Electoral College vote and potentially play out there causing further uncertainty.
“Are we going to get a Blue Wave (Biden Win and Blue Senate), a Blue Tide (Biden Win and Red Senate), a Red Line (Trump wins except house) or even a Trump Steal (Trump wins everything)? The Polls are fascinating and all over the place – yesterday’s crop of polls ranged from +1 for Trump to +12 for Biden. Who knows. Everyone and no-one.” — Bill Blain via MorningPorridge.com,
(NOTE: We are not taking sides in the “dog fight” but rather only trying to more objectively understand the market drivers).
A “BLUE WAVE” IS (WAS) PRICED INTO THE MARKET
The anticipated “Blue Wave” appears to not be materializing as the historical Democrat black vote is showing a noticeable shift to the Republican ticket’s “Law & Order” message. The Trafalgar and Rasmussen polls (which called the 2016 Trump victory), are now showing a marginal advantage to the Trump-Pence ticket. This is reflected in stock performance changes highlighted in Appendix “I” below.
A “RED WAVE” WILL BE MEANINGLESS WITHOUT A SENATE WIN
What if there is a large section of the country that did not vote for Trump in 2016, sees plenty of faults with the man and his policies, but sees him and his tweets as far less dangerous than self-righteous lefties who use their social media to get random people fired?
If polling trends are accurate, we’ve already seen President Trump greatly enhance his position with minority voters, whose communities tend to be the most hostile to the Left’s fetish for political correctness
. In particular, Biden may win 100 percent of the self-identified Latinx demographic, but Trump appears set to perform significantly better with Hispanic voters in both Florida
and the Sun Belt
Perhaps real populism in America is simply letting people raise a family and grill in peace? If so, maybe Murray Rothbard was right
about the potential for a uniquely libertarian brand of populism in America. We will find out on November 3rd (or more likely within a few weeks after)?
We should look for a very close election with disputed and legally contested results taking center stage. This is the issue for the markets which will cause short term market turmoil before likely exploding higher after the January Presidential inauguration as both sides are committed to dramatic increases in fiscal stimulus spending!!!
A recent Bank of America analysis laid out the 4 possible election outcomes, which were more dependent on the composition of the Senate than who is president. The worst scenarios for markets were those where “President Biden” faced a Republican Senate and vice versa for Trump.