Investment Strategists Muse How Election May Affect Stocks

US Election 2020

With the November election fast approaching, and so much hanging in the balance for the stock market and the economy, the time to start thinking about this is now.

We’ve been speaking of the potential impact of the November election in the United States for quite some time now, especially lately as the potential storm has started to appear on the horizon and people wonder what may fall upon us when it finally arrives.

While we don’t want to just act upon whatever beliefs we have until the market does. If the market starts boarding things up and heading out of town we need to follow, but we don’t really want to be acting ahead of things given the uncertainty involved. It is still wise to prepare though, to have an action plan for all three scenarios that we are faced with, involving either no change, a Democratic sweep, and a Biden presidency with the Republicans maintaining majority control of the Senate.

Several investment researchers are stepping up now to weigh in on both what they see is the likelihood of each scenario, and what they suggest we do with our investment portfolios in each of them. This is the right way to approach this, the only sensible way to do it in fact, rather than just preaching one of them and trying to promote a call to arms to either go to war or stand down well before any such action is needed.

Not everyone just shoots off their guns at the first sign of trouble, and the narrative that is being promoted by these strategists is one of not action but preparedness, which is the only sound way to proceed with the potential danger still fairly far off and the battlefront remaining quiet for now.

These things need to be understood the same way as we would heed any other type of potential trouble that is yet to manifest, where we get ready for action just like a group of soldiers would guarding a road in case the enemy tries to march down it. You don’t just shoot in the general direction of where they are expected to come, you instead watch and wait and have your finger on the trigger in case you need to use your weapon, but only to the extent that you actually do, something yet to be determined in this case.

While it may be interesting from an intellectual standpoint to ponder what the chances of each of the three political scenarios that may play out are for each of them, this is not the time to be betting any money on this at least until we see the market flinch enough.

We could see this happen anytime, as we don’t need to see the actual votes counted to start selling our stocks, but we have to travel with the pack as that’s the only sensible way to invest, as if you ignore the pack and try to venture off on your own, you may get out too early or be trampled by the mob if you hang around too long.

The feeling out there is that how the current pandemic plays out between now and the election may have a real effect on the results, even though there is no substantial reason to pin this on either candidate. Presidents don’t have any real say in these things, and the most they can really do is be a cheerleader, with Biden cheering on further economic harm while Trump has been rooting for a recovery.

Trump is seen to be the villain in this movie though for no other reason perhaps than the pinko media just blaming him for everything that they don’t like, alongside with refusing to give him credit for anything. It does therefore make some sense to believe that as the pandemic eases and the economy continues to improve, this might help his case, although a much more realistic hope is that the people will become aware enough of how much of a radical Biden actually is as well as the issues with his cognitive decline becoming more transparent, the kind of thing that many may get their first real glimpse of during a debate, where the media can no longer sensor his daily gaffes that strongly suggest he belongs not in the White House but in a nursing home.

This is the only real hope that Trump has, and although the betting public is setting the odds of him winning at 40%, people who bet on presidential elections don’t usually know all that much about them and are far from experts.

Biden may not choose to debate anyone but himself, from his basement. While refusing to debate would be the kiss of death for a candidate normally, he could probably still win handily by laying low, and may indeed wish to avoid having Trump eat his lunch and have people realize how out of it he really is, which is clear enough every time he goes off script, and a debate would leave him to his own resources, with his tank apparently running on fumes.

The Democrats are also the favorites to win the Senate as well right now, and it is going to take a real change to present the sweep that is feared so much by the stock market, where Biden becomes King and then seeing him become a puppet of the radical left that is pulling the strings of this party these days.

Scenario one, no change, would see things pretty much remain as they are now. Biden winning but the Senate remaining in Republican hands would be more annoying than anything, with the Senate still having the power to stand in the way of the bigger weapons that Biden and his ship of pirates wish to aim at us. A sweep has this ship aim all of their guns at us, with the only defense being a different outcome in the election of 2024.

When Reality Becomes Twisted, It’s All About the Perception

Ed Chissold, chief U.S. strategist for Ned Davis Research, sees the extent of the economic recovery and especially the public’s perception of it as being important to the outcome of the election. The Democrats would probably love to see the American people struggle for a little while longer, and while the Republicans don’t want to overdo it, they at least need to carefully manage their image as the two sides remain in a standoff.

President Trump’s executive orders on Saturday may not make all that much of a difference economically, but do create the right public image, even though the left-wing media will do their best to portray him as the bad guy as always. If Trump were powerful enough to wave his hand and fix everything, they would still bash him for everything that has happened thus far and more, and the fact that they make no sense is not only not an obstacle but an expectation, and they never disappoint on this one.

The gap between the two candidates has narrowed a bit lately, although it will take more than just improvements in the national polls to keep Trump from being thrown out of his home, and it can be reasonably presumed that his alleged training of Federal Marshalls in Portland beating back rioters that the media has hilariously put forth as his intention in trying to protect federal property might work against an unruly mob but won’t be quite enough to pull off a military coup.

Chissold speaks of Trump taking credit for a full economic recovery by election day as perhaps turning the tide, but we won’t have anything close to that this soon. Even if this were possible, this is not going to warm the hearts of his staunch opponents in the media who hold the brains of the majority of the country in their hands and can mold them into anything they want, with Trump hating being their prime directive at the moment.

This just isn’t a realistic hope, although Biden self-destructing enough, or actually showing enough people how much he has self-destructed already, might do the trick, which is what makes him facing off in a debate so dangerous. There is plenty of talk already from supporters to try to dissuade him from stepping up and showing us more of himself, seeing this as a situation where he has much more to lose than gain, which would be true.

Andy Laperriere, head of U.S. policy research at Cornerstone Macro, still gives Trump a 35% chance of winning and believes that the Senate is virtually a sure thing if Trump does win. The two are definitely connected, but it’s hard to imagine him being so sure of this given that the Republicans are so behind on both fronts right now. Trump could win and the change that precipitated this could sway the Senate races as well but it might not do so enough.

The real reason why Trump winning may preserve the Senate is that if the race ends up in a tie, the Senate will fall into the hands of the administration. Mike Pence would then become ruler over it, with the power to break all ties, instead of Biden’s VP, but the Republicans still have a lot of ground to make up to even go for a tie, and Trump winning may not be enough of a push in itself.

If the Big Storm Comes, We Need to be Prepared for It

Keith Parker, head of global strategy at UBS, predicts a 2% boost for stocks if Trump wins and his party keeps control of the Senate. This number looks way understated though when we consider that the fear of a different outcome has likely held the market back by more than this, and probably quite a bit more. The threat to the market of a Democratic sweep would be similar to it losing a war, and if your side instead wins the war, that’s going to be mean more than a couple of percent which is caused by matters far more trivial.

Laperriere believes that the status quo will prop up the market more meaningfully and is particularly bullish on the Nasdaq ETF QQQ, XLF, the financial sector ETF, and the Russell 2000, which can be traded under the symbol IWM.

QQQ has been a good bet for a very long time, although the same can’t be said about IWM, a small-cap index that comes with small sized returns to match. This is an index we should only be looking at if we feel better about not being greedy and betting on QQQ in a positive scenario, or may feel proud to see it plunge less if the Democrats take over the hill, instead of running away like those who are looking to protect themselves would.

Laperriere puts the odds on a Democratic sweep at just 45%, and while it’s not always so easy to put a number on these things, it’s way higher than this. Even the casual bettors see this at 60%, and it’s probably at least 70% in reality. Biden winning isn’t 100%, but is probably a good 90% given that this is well in the bag right now and he’ll win by a landslide if things don’t change substantially, although the potential for this does exist.

If we do get a blue wave, this will be the biggest blow to the stock market from an election that we have ever seen, by a long shot. The strategists speak of all of the various ways that the blue side will punish us, all those higher taxes, no more tax breaks for investments, and so on.

The reality of this outcome is even worse than they portray. Biden has already shown how well he plays the role of party puppet, given that he has been so willing to adopt the hardest core ideas of his advisors. With people like Sanders, Warren, and Ocasio-Cortez pulling his strings, they will turn him from his present role of Chuck-e-Cheese, the smiling rat with the shades, to Chucky the weapon wielding doll of horror movie fame, with eyes ablaze and Wall Street in his sights.

If this happens, this will be a pretty easy move to play, and forget about all the long side recommendations or hiding in some other asset such as bonds or gold, as this will be prime time for stocks, just not on the long side.

Fortunately, they offer inverse versions of these index ETFs, which is the way to go if Biden and the Bears take over because this will be so ugly for stocks. This will cause a great many investors to get hammered, the ones that don’t know any better and perhaps like to stay in the game and watch the action unfold like people stick to their seats watching Chucky movies, but this time Chucky is coming after them as well as the people on the screen.

Just like Parker only sees stocks rising by 2% if things remain the same, he uses some low numbers for a Democratic sweep, imagining only a 2-5% pullback if this horror show makes it to the theaters of America. The stock market scares pretty easily and we’re not talking about a minor issue such as an unpleasant tone in one of Trump’s tweets about China, which is enough to cause a move like this all by itself. A blue sweep is not a firecracker, these are real bombs we are talking about here, ones a lot bigger than we’ve ever seen and all planted under Wall Street.

Parker is even getting excited about these explosions producing buying opportunities, but unlike the last bear, this one will be moving in and won’t be leaving until the insurgents who are sworn enemies of the stock market are deposed, which means at least 4 years of real pain if you are on the long side.

Parker at least sees a bigger impact on earnings, where he sees a blue sweep as shaving off 8% from the earnings of the S&P 500. This number looks more reasonable, but we need to realize that markets always overreact and that’s more than enough to cause a real bear market in itself, not 2%, but over 20%, and probably considerably more than the official mark of how tall crashes have to be in order to qualify as a bear.

We sold off by 20% just from the Fed threatening higher interest rates, a flesh wound compared to the massive bullets that will be fired at us if the insurgents sweep. That one is not on even on the map, as we’ve never seen anything close to this, ever.

Clissold has been looking back upon past elections and does not see a Democratic president or even their holding all the cards as being historically scary. This is not the old days though, and this is a party who has gone from a historically fairly moderate one with leanings to the left to a party now that so far to the left that they have moved past even the hardest core socialists to the extreme end of this, where they are much closer to the terrorist organization Antifa than to the Democrats of old, scary close even.

As we have been saying all along, it doesn’t really matter all that much who wins the presidency this time around, but unless the Republicans can maintain control of the Senate, keeping enough troops in place to prevent political fanaticism, that’s exactly what we will end up with. This is not about just helping the poor more as the Democrats are so prone to doing, as that in itself may not be such a bad thing.

This won’t just have us looking more like more socialist countries in Europe, this will be far more dramatic, where our economy becomes trashed, as well as designs on turning the country over to criminals so they can murder and pillage to their heart’s content, with the full support of our government, who are out to join them in stealing both our prosperity and our constitutional rights. This is not your father’s Democratic Party by any means.

Madness may be on the horizon, and we may be down to prayers, but we certainly do not need to tether ourselves to the long side as far as our stock portfolios are concerned, as it’s just better to make lemonade if you are stuck with these lemons. They may take away a lot of our freedoms, but our freedom to not be subject to the whims of these politicians and the market in turn will remain.

We do need to see the chum in the water before we flee and especially start betting the other way, as unless the sharks are here to scare away the other fish, we don’t want them eating us. The waters are pretty clear now but keep your eyes fully open as the sharks ominously circle us just waiting for people to start running to swoop in.

Robert

Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

Contact Robert: [email protected]

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