Might a silent majority favoring Trump pull another election surprise?
“Overworked and overpaid, so no complaints.” No, I didn’t say that, an advisor client in New Hampshire did before my virtual election presentation to his clients this week. An advisor at the conclusion of another virtual presentation told his clients that “we’ll be here pretty much every day 24/7.” “This is crazy,” said my boss on a late afternoon call, about his day full of Zoom/Teams/Webex meetings. When I traveled for real, I could report on the state in which I was working. Now, packed days go by quickly as I virtually traverse the country with my pup at my side and the Mister cooking something that smells luscious. And spending my children’s inheritance on home improvements! At this juncture in 2016, when I was on the road more than in the office, I was writing about the very narrow path for a Trump victory and a possible contested election. Four years later, we find ourselves at the exact same place! Consensus is a Biden win but a long Election Night that stretches for days. BCA Research had been seeing a Blue Wave all year but its latest quantitative election model, which relies heavily on near-term changes in state economies, has the president squeaking out a win. Prediction markets indicate President Trump should outperform the polls by at least 3 percentage points, enough to potentially win some key battleground states where the average combined margin is 3.1 points in Biden’s favor, according to RealClearPolitics. But it’s hard to see a Trump win without my home state, where the polling gap is closer to 4 points. President Trump outperformed the state polls by a wide margin in 2016, but they should be more reliable this time given the number of undecided and third-party voters are at their lowest level since the 1940s.
Contrary to the “blue shift’’ narrative that says Trump may be leading on Election Night only to see states flip as mail-in ballots keep pouring in (the theory being more Republicans will vote on Election Day while more Democrats are voting by mail), Trend Macro thinks if Biden wins, we should know that night and if Trump wins, it could be weeks. Early voting and mail-in ballots already account for more than 60% of all votes in 2016, and disputes over the process ultimately may be settled by the Supreme Court and new Justice Amy Coney Barrett. An “orderly” Trump victory is seen as the most favorable for equities, with JPMorgan putting the S&P 500 upside at 3,900 by year-end. But most Wall Street houses see the market rising whatever the outcome as election uncertainty gives way to improving economic and vaccine news. Indeed, with all the chatter around the election, it’s the virus that’s been giving the market heartburn, with stocks on Wednesday suffering their worse day since June 11, when rising Covid cases, election chaos and declining oil also were topping the headlines. Case counts in the U.S. have risen nearly threefold the past two months, though deaths and hospitalizations remain well below spring levels. It’s the precipitous increases in Europe—and the dramatic responses being taken by France and Germany—that are more alarming, Credit Suisse says. While new 1-month lockdowns in each country aren’t as draconian as they were in spring, the concern is they may stall a budding “V” recovery. A key difference between here and there is our spike largely is in less populated areas where the impact is less problematic for the broad economy.
Despite the latest jump in Covid cases, Strategas Research expects continued strength in spending on goods, business equipment, manufacturing inventory and housing to keep the U.S. recovery on track, with a potential added benefit that the resurgence in cases makes more fiscal stimulus likely. The market does not appear to be re-rating growth and recovery assumptions on this week’s virus news as bond yields held their own, copper outperformed gold, emerging markets outperformed and Consumer Discretionary remained firm versus Consumer Staples. If anything, the risk story may strengthen, abetted by European Central Bank (ECB) President Lagarde’s version of "whatever it takes" to keep the recovery there on life support. This means it’s almost certain to add to the $9 trillion already pumped into global money supply growth so far this year by the ECB, U.K., China and the U.S. The S&P is entering its strongest period of seasonality with a myriad of obvious catalysts—the election, fiscal stimulus, medical science—just days/weeks/months away. An advisor in Michigan this week shared that “every client wants to spend the first 15 minutes talking about the election.” I’ve lost count of how many times I’ve heard some version of “my clients are scared to death of the outcome.” Indeed, twice on the same day this week I was told that an investor sold everything for the time being. Another advisor group remarked about “countless discussions of how investors do things at the wrong time.” You know, I’ve heard strong political opinions almost without interruption since 2015. But after delivering my election presentation many, many times these last two months, on Q&A and almost without exception, I’m hearing crickets…. The silent majority?
- On the road again ISI’s proprietary trucking survey, which has the highest correlation with real GDP of any single-sector survey, jumped to a 2-year high, suggesting the initial read on Q3 GDP, a whopping record 33.1% annualized increase, could be revised higher and is carrying momentum into Q4. Other reports reflected growing exports, robust production and housing, increased business investment (more below) and solid consumer spending, with September’s fifth straight monthly increase topping forecasts, aided by an elevated savings rate and higher personal income growth.
- A capex “V” September durable goods orders surprised across the board, with a key proxy for capital expenditures (capex), nondefense capital goods ex-aircraft and parts, jumping to a 2-year high. The pickup in investment intentions has not been limited to large firms; according to the NFIB survey, small firms, too, are getting ready to increase their capital stock.
- In the end, it’s all about jobs All three measures of unemployment claims improved this week (initial claims, regular state continuing claims and total continuing claims), and the American Staffing Association said temp employment (a leading jobs indicator) rose a fifth straight month. Temp-help services averaged just over 100,000 in October, up substantially from September’s paltry 8,100 gain.
- Housing catches its breath After surging for several months, pending and new home sales slipped in September, contrary to expectations. But on year-over-year terms, both remained at robust levels, with pending sales up 21.9% and new homes sales up 32.1%, close to their fasted pace since January 2013.
- Red ink will flow no matter Biden and Trump platforms would similarly contribute to federal debt stocks of around 125% of GDP over 10 years, JPMorgan says, with a difference between the two of only 2 percentage points.
- The hit to earnings if it’s Biden His proposals, if approved, probably would knock 9% off 2022 earnings, split evenly between the increase in the corporate net income tax and taxes on foreign income, Empirical Research says. It also thinks net profit margins would be cut by 8-10% for tech/growth leadership, versus 5% for the market at large.
Don’t forget about earnings Lost in election and Covid third wave headlines is a Q3 earnings season that’s easily beating expectations. S&P earnings-per-share estimate upside revisions are above their 90th percentile historically, with the Q3 consensus up $12, pushing the annual earnings run rate to $142. They were a depressed $112 in Q2 and, at their low for consensus in early spring, just $91.
Seems like Sweden got it right Relative to the rest of Europe, its financial market is down less 3% year-to-date, with economic confidence climbing six consecutive months on “brighter signals from all sectors.” While its Covid cases are spiking again, death rates remain minimal and it has relaxed guidelines for its elderly, bringing them into line with national recommendations that have kept its economy open since March. Sweden's state epidemiologist said, “I don’t think you can see it as a relaxation of restrictions. We’ve made it a little easier for a group in society to live a slightly more normal life when they’ve been isolated in such a way that they’ve felt pretty terrible, a lot of them.”
Senate races may be even more important Whether Dems control the senior chamber will determine whether a Biden win potentially puts a progressive agenda (Green New Deal, Medicare for All and a carbon tax) in play. The current outlook suggests contests here are even tighter than the presidential race, with potential Dem pickups ranging from one to six seats. The party needs a net gain of four to control the Senate.