The strangest election in history
With the election nearly three months away and polls/betting markets suggesting a possible Blue Wave, the one question arising more than any other during conference/client calls is how will higher taxes impact the markets? It’s arguable the market has yet to trade on the Biden tax plan, a mix of increases in capital gains taxes, corporate taxes and a more progressive income-tax schedule that Cornerstone Macro views as more than a complete reversal of the 2017 tax cuts. It estimates Trump’s net corporate tax cuts total $329 billion over 10 years, while Biden’s planned tax hikes represent $2 trillion, pushing the effective corporate rate up from 17.5% to 26.1%. The equity market has been resilient in the face of this plan, making it difficult for President Trump to argue Biden would be negative for 401(k)s and other wealth vehicles. Part of this market complacency may represent the belief that taxes or other growth-inhibiting moves won’t even be pitched until the economy is solidly back on a growth trajectory. Deutsche Bank thinks equities could even be helping the presumptive Democratic nominee, to the extent that an “all-in Fed” assuages fears about what the former vice president could mean for risk assets long term. The central bank is committed to holding down long yields and pinning short rates near zero, and is happy with negative real rates and increasing inflation expectations, Evercore ISI says. That’s positive for future growth and stocks. BCA Research thinks equities will grind higher regardless of the election outcome. Stocks historically have risen by 10% on average in the 12 months after a presidential election that yields single-party control, though the upside is smaller and the initial downside bigger than is the case with gridlocked government, which would be virtually assured if Trump wins.
Looking beyond the November election and the short-term devastation caused by the Covid crisis, Gavekal Research wonders if equity investors are starting to sense a policy regime change toward stronger real economic growth with more inflation. After what’s sure to be an extremely ugly Q2 print, higher rates of nominal GDP growth seem likely, fueled by astonishing experiments in open-ended deficit spending in every major economy. Central bankers all over have shifted from managing inflation to maximizing employment and minimizing the financing cost of government debts. If this transformation in the political economy persists, today’s weakness could be followed surprisingly quickly by stronger growth, Gavekal posits. It draws a parallel to the mass unemployment resulting from post-World War II demobilization, which most economists at the time thought would be followed by a second Great Depression. Instead, a golden age of post-war reconstruction and full employment ensued, followed by accelerating inflation in the mid-1960s. It’s not as if Trump, if he wins, is going to turn off the spigot. He’s been demanding lower rates since taking office and has even floated the idea of negative rates. If anything, he’s a Keynesian. He wants to spend more money to help the economy and his re-election, and has shown he is oblivious to budget deficits. In other words, it may not matter that much to the markets who wins the White House, Alpine Macro says.
Even in the Democrats’ best-case scenario, the party is unlikely to gain control of more than 54 Senate seats, well short of the necessary 60 votes to pass most bills. Hopes for “the nuclear option’’—the removal of the filibuster’s required 60 votes so legislation can pass with a simple majority—don’t look promising, but may not be needed for Dems if the Blue Wave scenario comes to pass. Roll Call is reporting that Sen. Bernie Sanders, in line to become Budget Committee chair, wants to expand the use of budget reconciliation, which allows bills to pass with simple majorities, albeit primarily for fiscal matters. Under a Biden presidency, budget reconciliation could be used to raise taxes. As for other parts of the liberal agenda, recommendations out of a Biden-Sanders unity task force, while moving Biden further to the left, lacked the full punch sought by progressive devotees. Notably absent were a federal job guarantee, the Green New Deal and Medicare for All. In the view of Bank of America, there no longer is a big difference between the two parties’ willingness to do deficit-financed fiscal stimulus. It thinks it may not matter at all who wins. A Democratic sweep could bring growth-unfriendly "supply-side" policies, including higher taxes and tougher regulation, while a Trump win likely would mean a continuation of growth-unfriendly trade policies. Relations with China will likely continue to deteriorate no matter who wins. It is also likely that taxes will have to be raised at some point to begin to pay for unprecedented stimulus, no matter who wins. We are all Modern Monetary Theorists now. Strange times, indeed.
- Housing red hot New home sales soared to a 13-year high and existing home sales jumped a record 20.7% in June as record-low 30-year mortgages rates (under 3%) lured buyers. Evercore ISI sees housing reversing a long period of downsizing, with low rates and work-from-home arrangements likely to continue post-pandemic, providing a tailwind to suburban housing demand.
- Look at EU! The European Union’s breakthrough budget agreement to aid member states narrows its north-south economic divergence and adds a powerful tailwind to eurozone markets, sentiment and activity, all of which already were responding positively to stimulus. Manufacturing and services jumped into expansion territory this month, pushing the eurozone composite PMI to a 25-month high.
- A big contrarian positive The American Association of Individual Investors bulls-bears survey has been bearish 21 straight weeks, with the latest reading one of the worst since the pandemic started. In all five meaningful market tops since 2009, AAII readings were persistently very bullish, Fundstrat says.
- On the precipice of the benefits cliff The first increase in initial jobless claims in almost four months suggests the job market’s recovery is losing momentum, while this morning’s initial Markit reads on July manufacturing and services signaled moderating improvement, with services still in contraction. The reports could add to pressure for Congress to extend, at least temporarily, additional jobless benefits set to expire next week as it hammers out a Phase 4 stimulus deal against a backdrop of choppy reopenings as Covid cases climb.
- Gulp! Market concentration continues to tighten with the top S&P stocks accounting for more than the total market cap of major indexes, including the Russell 2000, Japan’s Topix and Britain’s FTSE 100. The top 5 S&P stocks alone account for 22% of that index’s market cap. Also this week, for only the second time in history, the S&P advanced more than 50 basis points even as eight of 11 sectors were negative. The only other time this happened was Feb. 23, 2000, right before the tech bubble burst.
- Buckle up Volatility wise, elections used to be non-inspiring events, with extreme political views and fringe groups part of the game but never actual contenders. All this has changed the last four years, with rising political entropy feeding market volatility and politics acquiring a new dimension during the pandemic as a major source of uncertainty. Deutsche Bank believes if things don’t materially improve for the incumbent, volatility is likely until at least Nov. 3. It could linger weeks afterward, BCA Research adds, citing extreme polarization and the risk of vote recounts, contested results, Supreme Court interventions and refusals by either candidate to concede.
Is bitcoin next? Silver and gold prices are surging. The last time silver went on a run after clearing the $20 mark was in 2010, after which it proceeded to rise another 150%, hitting $50 in less than a year. Gold is less than 3% away from its all-time high $1,920 set in 2011. With no resistance so far, it seems to on its way to a new high soon.
Gen Z (born 1997 to 2017) The Center for Generational Kinetics estimates Gen Z (the generation roughly bookended by the defining moments of 9/11 that they were old enough to remember and the Covid crisis) must emit 8 times less in their carbon budget than baby boomers to stay within global warming benchmarks and will spend 3 million minutes of their life on social media—more than time spent eating, studying and face-to-face socializing combined.
My Mister would be aghast Bank of America shares a survey that found a third of men said they’d try makeup (for Zoom calls).