Monday, October 28, 2024

Thoughts on the Election

A lot of investors are now accepting that Trump will win the election, with a good probability of a Republican sweep of Congress.  I agree with the Wall St. consensus that Trump wins.  Harris is just not a popular candidate, and has much less name value than Trump.  Add to the fact that she's the VP under an unpopular President in Biden, who helped usher in a very high inflation period.  And she's a black female, which makes it the worst demographic to get elected for President in the US.  

Contrary to what many Democrats believe, white candidates have a built in racial edge over black candidates.  Male candidates have a built in gender edge over female candidates.  There is a reason that you've never had a female US President.  And you've had one black President, who only got elected because he ran against a female primary candidate and during a severe recession under a Republican White House, guaranteeing a Democrat win in the 2008 election.  

Harris will get the anti-Trump vote, and the Democratic vote, but she won't get much of the independent vote because of the above reasons.  Overall, it looks like Harris is very likely to lose, although I would still give her about a 10-15% chance of winning because the polls are close.  But I think polls still underestimate Trump's support because there are still lots of shy Trump voters who don't like to admit that they are voting for him because of his un-Presidential behavior, and he isn't politically correct.   

Under a Trump presidency, the Trump tax cuts get extended, some tax cuts are possible, some additional tariffs (unlikely as much as Trump threatens), and less immigration = slower population growth and labor force growth.  This will increase the fiscal deficit, increase inflation due to a combination of lower taxes and fewer workers, and lead to higher bond yields.  It seems some investors are jumping the gun, looking at history, and thinking a Trump win will be a repeat of his first term, when you had a roaring bull market in stocks.  This is only feasible if you have blockbuster earnings growth (unlikely without another Covid era money spew) or have a further expansion in valuations on top of already historically nosebleed levels.  All while bond yields stay high due to the inflationary impact of loose fiscal policy/higher tariffs/tighter immigration.  Odds are high that the next 4 years in the stock market are nothing like 2017-2020. 

Under Trump's easy money fiscal policy regime, demand is artificially increased which creates higher growth.  That higher demand has 2 release valves.  One is through the bond market.  The other is through the currency market.  If the Fed decides to stay vigilant against inflation by reacting to higher inflation with higher interest rates, then bonds become the release valve of this high pressure economy.  Yields go higher.  If the Fed decides to ignore the higher inflation, then the currency becomes the release valve.  Financial repression through negative real interest rates will weaken the dollar, leading to even higher inflation in a vicious loop that will cause a bear steepening of the yield curve.  Of course, if the Fed restarts QE, then the bear steepening is suppressed, at the cost of further dollar weakness. 

In the first higher yields scenario, you get higher bond yields and lower stock prices.  In the second financial repression, weaker dollar scenario, you have a wildcard.  It is hard to predict how that affects the stock market.  If commodities skyrockets along with inflation, that will make stock market investors nervous, and you could see earnings go up but valuations drop hard.  If inflation doesn't get raging hot like 2021/2022, then you could see stocks go up along with a weaker dollar. 

Powell will be Fed chair for at least the next year, and if he's a lame duck as would be expected under a Trump presidency, he will no longer have to play politics and will focus more on his legacy, thus try to keep inflation under control.  He will become more hawkish as a result.  If the stock market isn't in an entrenched downtrend, I would expect Fed funds rates to stay higher than what the STIRs market is anticipating, meaning that you should see only 2-3 more rate hikes from now till the end of 2025.  That will eventually catch up to the bond market, as the maturity wall for corporate bonds will be coming in 2025 and 2026.  Corporations will have to refinance at much higher yields than previously, and interest expense will continue to creep higher.  

I expect the stock market to eventually readjust to a return of a tighter Fed in 2025 by going down.  It may take a few months for this to happen as the initial economic bump up from having Trump elected should keep the stock market buoyant.  By the 2nd half of 2025, this short term Trump adrenaline shot will have to face the new monetary reality.  At that point, a 2nd half 2025 waterfall decline in an overvalued, overowned SPX will be matter of when, not if. 

You likely get a reprieve from hawkish monetary policy in 2026 if Trump does what I expect him to do, which is replace Powell with a dovish lackey for Fed chair.  But the financial markets are so short term focused that its not even worth thinking about till right before the Fed renomination decision. 

The longer term effect of a high deficit, negative real rates policy under Trump is political change.  There will be a different US president in 2028, and by that time, raging high inflation will cause immense pain to the bottom half of the population.  That would basically be handing the Democrats the keys to the White House and Congress in 2028.  Controlling inflation will be the priority among the masses and that will be when the Fed has to make a hawkish turn to accommodate public opinion.  A Democrat sweep will be waiting in the wings, and it will be accompanied with higher taxes and higher interest rates.  Again, this is a much longer term consequence of what is likely to happen over the next 4 years and is not something that is market actionable.  

It appears that the late Friday selloff was due to the telegraphing of an Israel strike on Iran over the weekend.  The unwind of the afternoon selloff has happened overnight, and we're right back to no-man's land.  This is a level in the SPX where neither longs nor shorts have much edge.  Although given my belief that there will be a Republican sweep in next week's election, I would rather be long than short from now till then.  Ahead of big events, the financial markets have a tendency to front run the expected result and squeeze out much of the post move juice that would have happened without the front running.  

I was hoping for a move lower ahead of the election on the uncertainty but too many investors have FOMO, and don't want to miss a rally on a Trump win, which most investors expect.  I got out of all shorts last week, on that small dip.  Seasonal weakness is now behind us, and after tech earnings this week, the corporate buyback window is wide open.  

It is tough to find a real edge here, because if there was a 100% probability of a Trump win, I would go long, but that's not the case.  There is some small probability of a Harris win, and that potential downside keeps me from chasing longs here.  I think its a bit late to be short here with the election only a week away.  Some may question the premise that a Trump win would be good for the stock market, and I agree long term.  Especially if bond yields remain high in 2025, which would be bearish for stocks next year.  But over the short term, the vol crush after a big event like a Presidential election being over would be enough to squeeze the SPX higher for at least a few days.  Even with bullish expectations that you have going into it.  

Bottom line, its not a good risk/reward spot for either longs or shorts for both stocks and bonds.  Some may be tempted to try to buy the correction in Treasuries but I see little upside near term there, and there could be one last reflexive dump in bonds after a Trump win.  If that happens, I would consider buying Treasuries for a short term trade.  Right now, I don't see much edge.  In the case that you get a move towards SPX 5750 this week, I would be a buyer of that dip.  Otherwise, likely to be on the sidelines. 

44 comments:

OL DAWG said...

Sold BABA calls 5.7 from 4.33. Long TSLA 11/8 265 puts 9.91

Anonymous said...

Seems everyone thinks a red sweep will cause inflation and long bond yields to rise. Nobody talking about the drill baby drill effect on cutting energy costs. Sure, cutting energy costs in half may be just an election promise but it could offset fiscal largesse and help moderate inflation pressures. I noticed you didn't talk energy cost pressures. How do you think a red sweep would affect energy?

Personally I think oil and natty spot prices go lower so I'm thinking producers and downstream does the best. I'm considering a bearish bet on oil paired with bullish on XOP and maybe even look at MPC and other refiners. I'm just forming these ideas so no position beyond my small energy long in XLE and AMLP.

Anonymous said...

I guess maybe I'd lean toward oil explorers and services more but the companies least hurt by low energy costs could finally take off. Gonna start making a list and waiting on the election results.

OL DAWG said...

Sold TSLA puts @ 11.40

OL DAWG said...

Kamala you're fired

OL DAWG said...

Long WBA 12/20 10 calls .46

Market Owl said...

Oil prices aren't controlled by the US producers, its controlled by OPEC (supply) and China (demand). It doesn't matter if Trump or Harris gets elected, the US producers will do the same thing. And there is very little extra productive oil capacity in the US. The US is maybe the most thoroughly explored region in the world.

OL DAWG said...

So are we going down after the election? I know that Kamala is going to cheat and wouldn't be surprised if she "wins" like that. That would piss off the market and could sell off on that fact alone. Even if they say the counts are too close to determine who is the winner the day after.

Market Owl said...

I am non partisan, I hate both sides. I will say this through. Trump lost in 2020, and he couldn't accept the fact that he lost to a senile guy. So he spread BS about rigged elections, and you MAGA suckers bought into the conspiracy theories and lies like a bunch of fish: hook, line, and sinker. Bottom line, he was a sore loser in 2020.

If I don't have any bets on the market going into this election, I could care less who wins.

MM111 said...

Yeah, one thing is for sure, they will do the same thing this time round if Trump loses. Being a sore loser at 10 y.o is passable. Being a sore loser when running for the presidency is pretty cringey.

OL DAWG said...

2020 election Trump was up over 1 million votes in most of the swing states at 10 pm. Then they stopped counting. When they started reporting again the next morning at 8 am Biden was up on all the swing states. I saw that shit with my own eyes. I would say the same thing again regarding what happened. They didn't even try to hide it. Totally in your face. And they keep saying the proof was the vote count.

Joseph F said...

Good summary Owl. Interested in what might happen if Kamala wins? I personally think she will go closer than you think.

Market Owl said...

Thanks. If Kamala wins, that will be a shocker for the market. The most obvious one would be a big move higher in bonds. The current bond market weakness stems from a fear of higher inflation due to Trump's fiscal policy. I would also expect a move lower in stocks, but I don't think a stock selloff would last for long, as Harris will just be a continuation of an expansion of government spending that you saw under Biden.

One long term wildcard is that Harris ends up being more inflationary than Trump for the economy. She will be more aggressive in sending out tax credits, various targeted stimmies to the lower and middle class, which is where the government spending has the most inflationary bang for the buck. And its possible that Trump lets Musk reduce some discretionary outlays, although I think its a long shot. My base case is that you will get no spending cuts under Trump.

MM111 said...

I think the market according to stats has actually priced in a Harris win, not a Trump win which is why we sitting at highs so we might get a relief move lower post election and then back to the grind up.

Anonymous said...

I actually think bonds are more likely to sell off when Trump wins. Pretty obvious to me deficits will be way higher under him

OL DAWG said...

Sold WBA calls @ .36 from .46. Long UAL 79 11/15 puts 2.35

OL DAWG said...

Long UAL 78 11/15 puts 1.86

OL DAWG said...

Damn CVNA. Someone here shorted at 170 :(

Anonymous said...

I did but via puts. Perplexing and will consider buying more for june 2025 tomorrow. My best trades all lose money for a w hile before paying back manyfold - this may be one

Anonymous said...

Probably completely manipulated ponzi scheme but will unravel at some
Point. They are not taking down carmax or amazon or something lol

Joseph F said...

thanks OWL

Market Owl said...

CVNA will be a very interesting short as we get closer to year end. Total short squeeze and appears to be some hedge fund that is definitely walking this up.

OL DAWG said...
This comment has been removed by the author.
OL DAWG said...

You should short more over 300. Previous high was 370 in 2021

Anonymous said...

https://x.com/kobeissiletter/status/1851779462200774983?s=48 - what do u think of this @mo?

Market Owl said...

It doesn't surprise me. Sentiment is very bullish. Upside is limited from here, but hard to time the top based on sentiment alone. You need to see toppy price action and we have not seen that yet.

Anonymous said...

Look at djt stock it has run up bill for last month of so in anticipation of trump win else why would it go up if market has priced in harris win

Anonymous said...

Look at djt stock it has run up bill for last month of so in anticipation of trump win else why would it go up if market has priced in harris win

Anonymous said...

Can we see a waterfall decline today?

Market Owl said...

This isn't an environment that produces waterfall declines. You need to go through a topping process first, where the markets show some volatility and then you get successive days of big downs days. Waterfall declines are 10%+ declines over several days, mostly in succession. This is nothing like that. I am actually looking to buy the dip today, and think we're close to a short term bottom.

Anonymous said...

sold all my spy puts. have a feeling this will go much lower after I sell but at some point, have to take the hit on a bad trade and wait for another day

OL DAWG said...

I invite all permabears recently converted to bulls to get long this market

Anonymous said...

lol. i cant given the valuations plus i will be decimated if it goes down after i go long after being wrong on shorts so many times

Market Owl said...

I am buying the pullback today. It could go down a bit more, but I think its a good spot to put on election rally trades here. I expect a move higher next week after a Trump win.

OL DAWG said...

I personally think we are going to have some kind of unrest this election. Just my unqualified opinion. Which will lead to uncertainty leading to volatility. But what the fuck do I know

OL DAWG said...

Sold UAL puts @ 2.93 and 2.40 respectively. From 2.35 and 1.86

OL DAWG said...

Long TLT 92 12/06 calls 2.17

Anonymous said...

If trump wins, we may go up more. But if he loses, markets will fall. And if there is maga drama on losing, they may fall lot more

OL DAWG said...

5650 should do it

OL DAWG said...

Major stocks aren't having a good earnings reaction. Earnings season also over pretty much

Anonymous said...

Thanks for your insights, do you really think market need to go up but more up before a correction, top tech stocks like of appl msft meta could not take this market up despite good earning , why would election result cause a small bull run, assuming this market was fabricated to stay afloat for till election , we should see sell the news right after it ,, in any case trump or harris neither party can justify the valuations or fix the issues that face economy

Anonymous said...

Thanks for your insights, do you really think market need to go up but more up before a correction, top tech stocks like of appl msft meta could not take this market up despite good earning , why would election result cause a small bull run, assuming this market was fabricated to stay afloat for till election , we should see sell the news right after it ,, in any case trump or harris neither party can justify the valuations or fix the issues that face economy

Anonymous said...

Why not have a 10% correction next week and then once results are announced invest according to who comes in power

Market Owl said...

The selling this week is pre-election de-risking and taking down of net positions ahead of event risk. Once the election is over, investors usually buy back and push markets higher once the uncertainty is lifted. That is usually what happens in a bull market. Add in bullish end of year seasonality and the return of stock buybacks after blackout ends this week. Odds favor the bulls from here for November.

I agree, Trump and Harris won't fix any long term issues, but they will keep blowing out the budget and that is inflationary and bullish for stocks long term.