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Election2020 quick briefing: Trump catches up, markets price for pullback
- Trump catches Biden in betting markets
- Polls narrow further as race tightens
- Options markets show concern
September 2nd saw an important development as betting markets turned in favour of Donald Trump being re-elected. The RCP average showed Trump +0.1pt over Biden at 49.8 to 49.7. Whilst clearly too close to call, the speed at which Trump has narrowed the gap shows how quickly things can change.
Betting markets are not, however, the same as polls. They are only market participants’ best guess at what the outcome will be.
US Presidential Election polls tighten as Trump eats into Biden’s lead
But polls also show a tighter race. Our US election poll tracker, which is powered by data from Real Clear Politics, has come in sharply. On a national level Trump is polling better than at any time since May and has eaten into Biden’s clear lead, which remains strong.
However, looking into the key battlegrounds where we know the fight will be bitterest and where it really counts, the lead Biden has is also narrowing and now well within the margin for error area. The latest RCP data shows Biden at +2.6 in the top battlegrounds, having been more than +6pts in July. Trump currently stands on 45.4 vs Biden’s 48.
Vix signals heightened election nerves
The tighter race is being displayed by more implied volatility in options markets for the S&P 500 than the stock market itself is showing. We have talked in the last few days about the Vix moving steadily higher even as the SPX rises – futures again pointing higher today after Tuesday’s record close.
This is the first red flag. The second is the term structure of the Vix futures curve which shows significant increase in expected volatility come Oct and Nov with a sharp 20% contango between the front and back months. Compare for example the CBOE Volatility Index Oct 2020 close at 33.51 vs the front month (Sep) at 28.35. Nov traded at 31.80.
This contango in the Vix is at odds with the general grind higher we are seeing and signals genuine anxiety among investors that the election will create the conditions for pullback.
Our Trump20 Blend – comprised of stocks seen as being most exposed to changes to corporate tax rates – is up but has lagged the broad market in recent days, whilst the dollar has softened despite a decent recovery on Wednesday.
Funnily enough, whilst the implied volatility is elevated around the election, all else being equal Trump’s low-tax, low-regulation agenda ought to be more positive for the stock market than a Democrat clean sweep would be. What this increased volatility may represent more is in fact investor fears about a disputed election result, which would considerably dent risk appetite going into the end of the year.
Trump approval rating holds up as Republican convention draws to close, battlegrounds tighten
We know that the Presidential race will come down to a handful of key swing states. But national polls still tell us something about the direction of the campaigns.
As the Republican convention draws to a close this week, the latest polls indicate Donald Trump’s standing remains at least stable. NBC News|SurveyMonkey Weekly Tracking Poll shows that 45% of American adults strongly or somewhat approve Trump’s performance, 54% disapprove.
Meanwhile there has been evidence that the race is tightening. This should not come as a great surprise – national polls showing Biden with a double-digit lead were never going to hold once the campaign proper got underway.
What’s interesting is the direction of travel in Trump’s favour in some key battleground states.
According to a recent CNN poll, the national split was 50% for Biden-Harris and 46% for Trump-Pence. That is within margin-of-error territory.
But drill down to the most important states for the Electoral College and it’s even tighter. In 15 battleground states the poll showed Biden with just a single percentage point lead – with the Democrat on 49% and Trump on 48%. The latest poll for Wisconsin shows Trump edging it for the first time in months.
According to RealClearPolitics, which powers our Election Coverage, Trump trails on 42.4% to Biden’s 50% nationally. But in the battlegrounds the gap is narrowing, and Trump leads in some.
And as can be seen by the electoral map, it looks like a toss up as to who will win in November.
Mail-in Ballots: The Battle That Will Decide the War?
Track all the latest developments in the race for the White House with the special US Presidential Election 2020 site from Markets.com.
With the coronavirus pandemic calling into question the safety of in-person voting this November, many states have already taken steps towards allowing voters to cast their ballots from home during the US Presidential Election 2020.
President Trump has repeatedly spoken out against such actions, citing rampant voter fraud as a potential consequence of mail-in voting. However, behind the veneer of concern for electoral integrity, lies the real reason for Trump’s focus on the issue: turnout.
Turnout concerns for Trump as ‘swing states’ expand mail-in voting
If voters had turned out in 2016 as they had four years previously, Hillary Clinton would now be sitting pretty in the White House: a recent study shows that her 2016 defeat was largely down to a sharp decline in minority voting.
Recent research by the New York Times suggests that the proliferation of mail-in voting nationally could increase overall turnout by as much as 9%, with particularly large upswings among young and minority voters.
Given that these demographics heavily favour the Democrats, it is easy to see why the President is eager to discourage any move towards mail-in voting for November’s election. And yet, despite Pres Trump’s protestations, every one of the crucial ‘swing states’ has already taken steps towards a liberalisation of their vote from home policy.
Do mail-in ballots really disadvantage Trump?
If we look at each of these states in more detail however, we see Trump has less to fear. The rust belt states like Michigan, Wisconsin and Pennsylvania simply don’t have the diversity that would benefit from the mail-in votes.
If the Democrats are winning there, then they’ve already got enough cross-community support to be sure of success, whether it’s through ballots cast in person or through the post.
Focus on Florida in US Presidential Election
There is one state that is diverse enough to cause Trump to stumble, and that’s Florida. Famous for George Bush’s hanging chad victory in 2000, where he scraped out a gain of just 0.01% of the vote, it’s possible that mail-in ballots might boost the Democratic demographic enough for Biden to steal the state.
Hence Trump’s latest provocation. He has threatened to withhold funding from the US Postal Service (USPS), which could render mail-in voting unfeasible. It could also upset the President’s own voter base, as it risks alienating rural voters who are heavily dependent on the USPS.
Will threatening USPS aid progress on new stimulus bill?
The truth is that he is merely using this threat as a bargaining chip in the latest round of Congressional stimulus negotiations. If the Democrats play ball with his fiscal plans, he will leave the USPS alone.
It also is yet another classic Trumpian tactic to provoke the woke. He relishes poking at the dividing lines of America. The noise delivers oxygen to his campaign, stealing headlines from his opponents, as well as forcing the liberal left into ever more pearl-clutching outrage that incenses his right-wing voter base.
Impact of mail-in voting on the Senate
Given that any President’s legislative agenda depends on which parties hold the balance of power in Congress, mail-in ballots might prove decisive for determining if the Republicans can hold onto the Senate.
The picture here is rather similar to that of the Presidential election: the vast majority of competitive states lack the diversity required for mail-in voting to be decisive, but a small and significant minority should still be highlighted.
In particular, of the ten states that will decide the balance of power in Washington come 2021, two are likely to see a sizeable Democratic advantage, thanks to new vote from home protocols: Georgia and North Carolina. However these are typically Republican leaning, so the Democrats will have to be sweeping across the nation to ensure they pick them up.
How worried should Republicans be?
Given that many states have already opted to shift towards mail-in voting, the Republicans have already lost the battle over voting from home. Whilst the President will continue to make a lot of noise on this issue, dragging out threats of USPS defunding, come election day voting from home will be ubiquitous.
Far from being the final nail in the coffin for the Trump campaign, voting from home poses only a minimal obstacle to re-election in the vast majority of swing states.
Florida is the only, but perhaps crucial, exception to this rule. Whilst not election-deciding in and of itself, we have seen Presidential elections in the past be decided by far, far smaller margins. And in the case of the Senate, we see a similar story: small but potentially crucial areas where mail-in voting could have the deciding impact.
Advantage Biden. Advantage Democrats. But only just.
Don’t forget to check out the latest polling data for the US Presidential Election 2020.
US Presidential Election: Step Forward, Kamala
After months of deliberation and internal conflict, the Biden campaign announced this week that Kamala Harris would join his ticket this November. Praised for her articulate dynamism during the primaries, and famed for her debating acumen, this choice will inject some much-needed energy into the Democratic ticket
In the short term, this announcement will afford the Biden campaign a flurry of positive press coverage, likely leading to a bump in the polls. However, with almost three months to go until election day, this short-term hype is largely irrelevant. She won’t be able to move the dial where it counts: the swing states.
Harris’ well-spoken nature will help to keep the attention away from Biden as much as possible, reducing the risk of a race-ending gaffe. He can stay in his bunker while she takes centre stage. Whilst the presence of such a dynamic running mate will likely make Sleepy Joe look like Even Sleepier Joe, this will not impact the race in a meaningful fashion – voters have already made up their minds one way or the other on Biden: endearingly gaffe-prone or scarily senile.
Senator Harris brings with her two strategic benefits:
- Law and Order
- Criticised in the primaries for her overly harsh sentencing decisions as California’s Attorney General, this record will become an asset in winning over the centre, given the current climate of unrest. Although such a record upsets the left wing of the Democratic party, their votes can be relied upon as they are so keen to dispose of Trump
- Campaign funding
- Harris has deep roots in California politics – first as Attorney General and then as Senator. Her home state is notorious for its heavyweight fundraising capacity, particularly from Hollywood and Silicon Valley. Having built a decade long relationship with these donors, Senator Harris’ presence on the ticket will open up a huge reservoir of campaign funding. However, this flood of cash comes at a price. The Republicans will be eager to capitalise on this Hollywood connection by levelling accusations of ‘Liberal Elitism’ at the Biden-Harris ticket, which could be potentially damaging in the crucial rust belt states. Luckily for Biden, he has a long-established reputation as ‘middle class Joe’ which can neutralise this line of attack.
So, nationally it would appear that Senator Harris brings with her an injection of energy and a mountain of cash – both extremely useful on the national level. However, as Hillary Clinton discovered in 2016, the national vote means nothing without an electoral college majority. It is the swing states who will decide this election one way or the other, and it is in those states where the Harris pick is likely to resonate least.
Many have predicted that Harris, as a black woman, will help to achieve a surge in minority turnout. However, it should be noted that polling indicates only 6% of African American voters thought race should be a factor in the selection of a VP. And in any case, it was Senator Warren, not Senator Harris, who African Americans preferred for VP prior to this announcement. Therefore, if a surge in minority voting is to occur in November, it will not be as a result of Harris’ VP candidacy.
And a side note, if Biden does win this November, Harris will leave a vacant California Senate seat in her wake – one of the most liberal states in the country. The left vs centre battle that played out in the Presidential primary will be replayed in that race too, reopening old wounds and worsening Democratic divisions.
President Trump will be keen as always to profit from divisions wherever he can find them. He has already attacked Harris as being of the ‘radical left’ and ‘phony’. Being a woman of colour from California, Harris hits all of the Trumpian flash points – a chance for Trump to roll out his favourite electoral strategy of inflaming tensions and forcing the electorate to take sides.
Overall, Senator Harris will provide the Biden campaign with a much-needed sense of energy and a near-limitless supply of campaign cash. This will boost Biden’s chances of winning the popular vote but is likely to be less effective in the crucial rust belt states where she will simply play into Trump’s strategy of provoking disagreement between the haves and have-nots.
UK enters worst recession, European stocks steady after Wall St slips on stimulus doubts
What did I miss? Stimulus measures keep being debated, vaccine hopes are at first raised then more sensibly assessed, and stocks in the US keep going up; the S&P 500 has risen about 5%, whilst European markets are flat over the period. I seem to recall in July a lot of chatter about European equities outperforming, but there has been little to show from that trade so far. Gold has smashed a new all-time high and profits been taken, an easy win for most, whilst oil prices have barely moved.
UK economy posts worst decline since records began
So, what has changed? Britain’s economy is on the ropes, but we knew this already. UK GDP fell by 20.4% in the second quarter, which was largely in line with expectations. Economic activity is bouncing back – the economy grew 8.7% in June but remains well below the levels seen in February. Having been out and about over the last three weeks, I can safely say there will be more recovery recorded in July and August.
But getting back to 2019 levels of activity is going to take a very long time as we see permanent impairment in certain sectors of the economy, as well as behavioural and social changes. Cable recovered off the 1.3020 horizontal support formed by the low on Monday on the update to continue to trade its August range. With the dollar turning around and seemingly finding its near-term support, GBPUSD may struggled to hold its 1.30 level.
Gridlocked US stimulus talks weigh on stocks
The Democrats and Republicans can’t agree anything. Stocks on Wall Street slipped after gridlock in Washington left investors wary of pinning their hopes on a bipartisan stimulus package, but the S&P 500 was at one point just a few points from its all-time high at one point and could still take it out this week. Senate majority leader Mitch McConnell naturally blamed the Democrats for this but revealed the two sides had not spoken since Friday.
The Dow and S&P 500 both snapped a 7-day winning streak, whist European markets rose a touch on Wednesday’s open after a strong run-up on Tuesday. The FTSE 100 continues to trade the narrow range of the June pullback without any signs of breaking out.
Gold tumbles on profit-taking
The lack of fresh stimulus left gold bulls wary and profits were taken but we have seen a big bounce off some important technical support this morning. Spot dropped under $1900 but found support on the old resistance at $1865 and the 200-period SMA on the 4hr charts may offer some technical support. More important is the trend support offered by the line drawn from the lows made since the March trough.
Gold’s rally has been all about stimulus and inflation and so doubts about whether there will be more stimulus saw investors recast inflation expectations a little and the technical exhaustion of the move needed to be factored in. US real rates rose, with 10yr TIPS back to –0.99%, having struck a low of –1.08% last week. Benchmark 10yr yields rose to 0.66% but whilst real rates are so deeply negative gold will have support.
Chart: Gold recovers $1,927 after finding support at $1,865
Biden picks Harriss as running mate
Joe Biden named Kamala Harris his running mate for the race to the White House. Two points about this really stand out. The duo needs to get the vote out, and Harris should energise many who may not otherwise vote, but they cannot risk losing the centre in the rust belt where the issue is the economy.
But the problem for Trump is that accusations that Biden’s VP pick was too zealous a prosecutor when acting as California attorney general make it difficult for Republicans to say the Democrats won’t be tough on crime. Her appointment will somewhat blunt Republican attacks on law & order.
The key question for investors is who wins in November and whilst details like VP picks are important, they are just a small part of the story. Trump still wins in my opinion whatever the polls are saying.
Kiwi weakens after RBNZ extends QE, opens door to negative interest rates
New Zealand is in full panic mode, locking down Auckland amid a mystery outbreak of Covid. The RBNZ duly announced it would expand the Large Scale Asset Purchase programme to $100bn, which just nudged the kiwi lower. But the real focus is on negative rates – a full four mentions of the committee looking at a negative OCR were in the release. Lower and negative rates is increasingly the path of least resistance for the RBNZ, which makes the NZD open to further downside risk.
Oil prices were up a touch, with WTI (Sep) taking a $42 handle this morning ahead of the inventory figures from the US Energy Information Administration, which are expected to show a draw of 2.9m barrels. API data yesterday showed stockpiles fell 4.4m barrels last week.
Elsewhere in FX land, watch the double top on the EURUSD pair with the rejection of 1.19 looking more convincing we look for neckline support around the 1.17 level to hold for bulls to make a fresh drive higher. However, the pullback in US Treasuries and uptick in yields may offer support for the dollar to push back hard.
What will happen to the US dollar if Trump wins re-election?
After years of threatening a devaluation, in the face of China’s own currency manipulation, President Trump recently indicated that he is now in favour of a strong dollar. Given the President’s inconsistency on the issue, and the current turbulent economic environment, what exactly would a second term entail for the most important currency in the world?
How a second Trump term could impact USD
The crucial distinction here is one of means versus ends. In the mind of President Trump, the currency is just a tool to deliver a buoyant stock market and booming economy, whatever he might tweet.
The Trump administration will do whatever it takes to catalyse the recovery, whether appreciation or depreciation is the required remedy. In our view, the latter will prove to fit the bill, and so the US dollar’s value will fall if the Trump train continues to roll through November.
Whilst the dollar has been relatively stable in its value over the course of Trump’s first three years in office, the gargantuan nature of the economic task at hand means that this trend simply cannot continue.
When he began his first term, the economy looked to be in a relatively healthy state. Discounting the remote possibility of a miraculous economic recovery, his second term will debut in very different circumstances.
Massive relief spending set to continue
Looking at the demand side, one could be forgiven for assuming that a dollar appreciation was imminent. The US economy comfortably outperformed the G7 and G20 averages in the first quarter of 2020, shrinking by just 1.3% compared to 2% and 3.4% respectively.
This is likely the result of mammoth congressional stimulus packages, which have allowed the US to lead the world nominally in terms of relief spending and come second in terms of percentage of GDP.
A second Trump term would almost certainly see further waves of relief, likely in the form of his $1 trillion infrastructure plan. This particular avenue of execution benefits from relatively healthy levels of bipartisan support, meaning that such spending can be expected no matter who controls the Congress come 2021.
US stocks likely to continue outperforming, pressuring USD
And in terms of the stock markets, the US has also consistently outperformed global averages throughout the President’s first term, including in the post-Covid era.
This is exemplified by the fact that the S&P 500 index has risen by over 50% since 2016, whilst the FTSE has fallen by around 9% in this same period. Given all of the above, the US is likely to continue attracting investors the world over, delivering inflationary demand-side pressures that would support USD.
However, the aforementioned upward pressure caused by a healthy economy will be insignificant when compared with the deflationary pressure instigated on the supply-side.
Federal Reserve stimulus measures will help Trump get weaker dollar
Since February, the Federal Reserve has increased its balance sheet by almost $3 trillion, moving from $4.2 trillion to $7 trillion. This rapid increase is expected to continue, with Trump calling the policy ‘something that’s really great for our country’.
In addition, the possibility of extreme measures in the form of yield curve control is rising, with several current Fed governors commenting that the policy should be on the table if necessary.
All of this is indicative of our central point: the authorities are prepared to do whatever it takes to prop up the stock market and the real economy and will stop at nothing to achieve this end.
Expanded balance sheet, flat interest rates, yield curve control to cause dollar depreciation
Trump has repeatedly held up rising stock prices as a beacon of success in his first term and will continue to do so if he wins a second. With quasi-control over the Fed, afforded to him by his position at the bully pulpit, the President will get what he desires, no matter the cost.
In this particular instance, the cost will be an expanding Fed balance sheet, rock-bottom interest rates and, if it comes to it, yield curve control measures. The sheer enormity of the response on the supply-side will be more than enough to drown out any inflationary pressures on the demand-side – depreciation inbound.
Overall, Pres Trump doesn’t really care about the value of the dollar outside of its utility as an economic tool or a stick with which to hit China. The real motivation behind the President’s actions in a second term will mirror those of the first: growth in the stock market and the real economy, in that order of importance.
In his pursuit of these goals, no policy instrument is off limits, whether it be a trusty expansion of the Fed’s balance sheet, or an as yet untested tool like yield curve control.
Whilst the Fed is technically a quasi-independent body, such independence is illusory, particularly in the context of Trump’s propensity for the use of public pressure. Whilst some demand-side inflationary effects will be initiated by a better-than-average recovery, such effects will be lost in the vastness of the supply-side avalanche that is to come.
If he achieves a second term, Pres Trump will leave office in 2024 having achieved two things that he initially desired: a stock market on the rise and a depreciated dollar.
Trump suggests delaying US Presidential Election, US GDP better than expected
US President Donald Trump has tweeted that the US Presidential Election 2020 should be delayed beyond November. US stock market futures paid little attention to the comment, but the Dow was 300 points in the red anyway after US growth and jobs data. Trump claimed, without providing any evidence, that November’s ballot would be “the most inaccurate & fraudulent election in history”.
With Universal Mail-In Voting (not Absentee Voting, which is good), 2020 will be the most INACCURATE & FRAUDULENT Election in history. It will be a great embarrassment to the USA. Delay the Election until people can properly, securely and safely vote???
— Donald J. Trump (@realDonaldTrump) July 30, 2020
Can Trump delay the US 2020 Presidential Election?
The president has long taken issue with mail-in ballots, and has claimed before that they pose a high risk of fraud. Many states have already taken the decision to open mail-in ballots to all voters for safety reasons given the huge number of coronavirus cases in the United States.
As Helen Thomas pointed out in our earlier election coverage, “recent electoral results have indicated that expanding vote-by-mail favours Democrats, as the easy access to the ballot has increased turnout in their favour”.
US GDP better than forecast, but jobless claims rise
Markets were little cheered by the latest US economic data, despite a smaller than expected decline in Q2 GDP. The economy shrank by -32.9% between April and June, compared to forecasts of a -34.1% drop. The decline is still the largest drop in output since the Second World War.
Jobless claims figures published alongside the latest US growth data pointed to a small uptick in claims. 1.434 million Americans filed for jobless benefits in the week ending July 25th, up from 1.416 million the previous week. The four-week average has risen from 1.360 million to 1.368 million, and the number of continuing claims rose from 16.2 million to 17 million – a much larger increase than had been forecast.
Stocks edge further into negative territory
European stocks and US futures slowly drifted further into negative territory after the data, with Wall Street going on to open around -1% lower. Equities had been languishing in the red ever since this morning’s European data, which showed a larger-than-expected drop in Q2 GDP for Germany and a rise in Eurozone unemployment.
US Election2020 fast update: Biden ramps clean energy plans
- Biden plans $2tn clean energy investment
- Clean energy stocks may prosper under Democrat clean sweep
- Potential risks?
Clean energy stocks were among yesterday’s best gainers as Joe Biden, presumptive US Democrat president, outlined a $2tn green energy and infrastructure spending plan. Traditional oil companies also rebounded, with Chevron and Exxon up over 3% and Schlumberger, EOG Resources and Halliburton both adding over 5% as Biden appeared to steer clear of any fracking bans.
Biden plans “irreversible path” to net-zero emissions
First the numbers – it’s more money, faster with a more ambitious target than in the primaries after – it has all the hallmarks of Bernie Sanders on it. The $2tn over 4 years exceeds the $1.7tn over ten imagined in Biden’s primary campaign.
Biden outlined plans to set the US on an “irreversible path” to net-zero carbon emissions by 2050, with an ambitious goal to build a carbon pollution-free power sector by 2035. There is a clear break being made with the oil & gas sector implicit in this, but crucially we did not hear an aggressive take on fracking or proposals to restrict US shale.
The focus was on job creation in new industries, not on going after the oil & gas sector per se, albeit the proposals clearly imply a far more aggressive shift away from fossil fuels than a Trump administration would pursue. As much as it cemented the Democrats as the green party, this is an election pitch to voters in some key swing states who may have lost their jobs.
Meanwhile, the Democrat proposals would also involve upgrading millions of commercial and residential properties over 4 years to increase energy efficiency, with among other things the installation of solar panels, which is a potentially huge growth area (Sunrun, Solaredge, FirstSolar).
We also note a positive policy position on EV (Tesla, Nikola) with plans to invest in 500,000 electric vehicle charging stations. Biden’s goal is to combine going green with economic recovery: to Build Back Better. He is promising to create 1 million new jobs in the auto industry, domestic auto supply chains, and auto infrastructure, from parts to materials to electric vehicle charging stations, which will depend on the repurposing of the auto industry from ICE to EV.
How will oil and gas sector workers react in key states?
Whilst Biden is playing a strong hand here in tying jobs and economic recovery to the green economy, killing two albatrosses with one very large boulder, there are of course risks to this strategy, notably among the millions of workers in the oil & gas sector in states like Pennsylvania and Texas.
Biden boasts of creating more than 250k jobs “immediately to clean up local economies from the impacts of resource extraction”, but they may see Trump as a better guarantor of their jobs when it comes to the crunch.
Broadly the announcement appeared to be positive for the S&P 500 Energy sector, which rose 3.43%. Our Biden20 Blend clean energy constituents, selected as potential gainers from a Democrat clean sweep, notched broad gains, with some solar energy names taking off after Biden’s announcement.
|Company||Ticker||% daily move|
|Brookfield Asset Management Inc||BAM||+2.93%|
|Brookfield Renewable Partners||BEP||+3.92%|
|Atlantica Sustainable Infrastructure||AY||-1.95%|
|Nextera Energy Partners||NEP||+2.95%|
Will Joe Biden crash the stock market?
Will stocks go down with a Biden win and Democrat clean sweep?
Joe Biden launched his $700bn economic plan by taking aim at Wall Street, banks, the stock market and shareholder capitalism in general. Based on polling data, the stock market will need to better reflect the chance of a Biden presidency combined with a Democrat clean sweep of the House and Senate.
Biden issued a threat to “end to the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholder”. Biden, whose policies would tend to raise taxes and regulation risk for corporate America, added: “During this crisis, Donald Trump has been almost singularly focused on the stock market, the Dow and the Nasdaq. Not you. Not your families.”
The argument about taxation is central to the thesis, as explained by Goldman Sachs in a recent note. The bank noted the US used to have one of the most uncompetitive corporate tax regimes in the OECD at 37% vs the average 24%. Donald Trump changed that with Tax Cuts and Jobs Act (TCJA) 2017…
Under Trump the effective tax rate paid by median S&P 500 company fell by 8 percentage points, from 27% to 19%, which boosted EPS in 2018 by 10%.
Since 1990, declining effective tax rates have accounted for 200bps of the 400bps increase in net profit margins and 24% of total S&P 500 earnings growth, according to GS.
But Joe Biden could undo the cuts and lower earnings for the average S&P 500 company. Under his plans statutory federal tax rate on domestic income would go up from 21% to 28%, reversing half of the cut from 35% to 21% instituted by the TCJA, according to the Tax Foundation.
GS notes that a Biden presidency could also result in a doubling of the GILTI tax rate on certain foreign income, a minimum tax rate of 15%, and an additional payroll tax on high earners. Biden could increase capital gains tax, which could push investors to sell down stock holdings before it is introduced.
According to GS this would cut the S&P 500 earnings estimate for 2021 by roughly $20 per share, from $170 to $150. So, the average EPS would fall 12% just at the time that earnings need to rise to support valuations. The S&P 500 traded at a forward earnings multiple of about 23x in June – the highest since 2001
Regulation risk would also rise on the expectation that a Democrat-controlled Congress and White House would impose tighter restrictions on corporate behaviour, such as buybacks, and increase the cost of doing business by raising the minimum wage and employer contributions. Finally, higher taxes on the rich leaves less cash to invest in stocks.
Stocks choppy after sharp risk reversal, gilt yields strike fresh lows
Stocks continue to chop around their June-July ranges after risk sentiment rolled over at the start of yesterday’s US session. Surging Covid cases, hospitalizations and deaths in several US states continues to weigh on risk sentiment, Donald Trump was dealt a blow by the Supreme Court, and Joe Biden – who may well become the next president – said he would end the era of ‘shareholder capitalism’.
Around 3pm yesterday we saw a sharp reversal in risk appetite as stocks, bond yields and oil fell and the dollar rallied. California, Texas and Florida reported their biggest one-day increase in Covid-19 related deaths. Stocks hit the lows after Florida reported a spike in Covid-related hospitalizations, but recovered somewhat after Dr Fauci, director of the National Institute of Allergy and Infectious Diseases, revealed Moderna’s coronavirus vaccine candidate would enter phase 3 trials soon.
Supreme Court rules on Trump tax returns, Biden announces economic plan
The Supreme Court ruled Donald Trump’s tax returns should be seen by the Grand Jury, but it threw out rulings that allowed Democrat-led Congressional committees to obtain Trump’s financial records. Although this means further litigation, it should mean the documents are not a factor in the election.
Meanwhile, Joe Biden launched his $700bn economic plan by taking aim at Wall Street a threat to ‘end to the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholder’. Whilst no Bernie Sanders, there is little doubt that Biden will raise taxes and regulation risk – equity markets need to start to price in the risk better and there are signs that some investors already are.
Investors need to be wary of a Democrat clean sweep of the House, Senate and White House, which could greenlight some pretty aggressive redistributive policies. ‘During this crisis, Donald Trump has been almost singularly focused on the stock market, the Dow and the Nasdaq. Not you. Not your families,’ Biden added. After 2008 it was fashionable to bash the banks, now all corporate America is fair game if they are not woke enough. ‘Wall Street bankers and CEOs didn’t build America,’ Mr Biden said.
Europe opens weak, turns green
European shares were choppy after Asian markets fell and China’s equity rally finally ran out of steam. The FTSE 100 fell under 6,000 this morning before paring losses, returning to the low end of its June range. After a weak open, European indices were turning green after the first hour of trade.
The S&P 500 struck a low at 3,115 yesterday before closing down 0.5% at 3,152, flat for the week. Energy stocks led the drop, declining 4% as oil prices sank. Futures are lower and indicate a weaker open at the 61.8% retracement of the June-July range. The Nasdaq rose 0.6% to a fresh record as the tech sector continued to be the only real area of safety.
US unemployment numbers were a little better than expected but continue to show just how long the road is ahead. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.
Treasury yields fell, with US 10s back to 0.58% having notched a record low yield on an auction. UK 2- and 5-year gilt yields have hit a record low this morning, following Eurozone and US yields lower. Investors are showing no fears that massive issuance is going to force up borrowing costs as long as central banks remain in full support mode.
WTI through trend support as risk appetite cools
Crude oil fell sharply with stocks as risk rolled over. WTI (Aug) broke down through the trend support and may push lower. From a technical perspective we can start to consider completion of the head and shoulders reversal pattern and look for the move to head towards the neckline around $35. The IEA’s July report this morning suggested oil demand will pick up in the second half and that the worst of the demand destruction is behind us.
The IEA said oil demand this year will average 92.1m bpd, down by 7.9m bpd versus 2019, which is a slightly smaller decline than forecast in the April report, mainly because the decline in the second quarter was less severe than expected. But at this point it remains very hard to say how demand will recover longer-term given we do not know how the virus will progress nor how governments and citizens will respond – at least it seems negative prices were only a blip.
Fresh shutdowns in the populous Sun Belt states remains the worry, albeit we did see a decent draw on gasoline stocks last week, according to the EIA. Nevertheless the IEA noted that the accelerating number of Covid-19 cases is ‘a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside’.
Elsewhere, gold fell with risk assets, with the near-term pullback finding support at $1796 and should look for consolidation around the $1800 level. The outlook for gold remains constructive and we should expect lots of pullbacks along the way – nothing goes up in a straight line, and gold is particularly prone to these tactical retreats. In FX, the dollar rallied on the broad drop in risk sentiment. GBPUSD moved down to test near term trend support formed by the bullish channel. EURUSD pulled back from highs at 1.1370 to chop around the 1.1270 region.