Red or Blue, It's Stimulus For You
It's Still a Matter When, Not If
First off, I hope the weekend was nice for everyone! Over the past week, a lot more of you are reading my work here so I wanted to take the time to recap what I am doing.
These are just MY thoughts as I try to understand the ebb and flow of the market and the economy. I am writing out the the conversations that I am having with myself as I look at charts, read articles and opinions or while out running on a cool October morning. I have decided that this is better than actually having those conversations out loud. This is NOT investment advice. If I mention a stock or ETF that I own, I will tell you I own it…this does not mean that it is right for you. But, I am open to dialogue so feel free to leave a comment!
Finally if you like what you are reading please share it.
It was a quiet weekend on the news front and I didn’t see anything that changes the prevailing narrative as it relates to the election or markets for that matter. The consensus view remains that VP Biden will take the White House and there will be a “blue wave” in the Senate. If this is the scenario that plays out, the odds favor a fiscal stimulus package(s) that is / are larger than than what is being discussed currently. The bid / ask spread between the White House (now $1.8 trillion) and Speaker Pelosi ($2.2 trillion) has narrowed, but I have wonder “why would Pelosi move?” She sees the polls! Why not wait another few weeks. In the event that Trump is a lame duck into the end of the year, perhaps he will spend that time being more accommodating and will be willing to agree to terms on which he would normally play hardball. Why? So that he has these as talking points as he transitions into life after politics. Or maybe I am completely out to lunch here?
COVID is where the most interesting dynamics are playing out as the case count is rising globally and the news on the vaccine front has taken a turn for the worse with the pausing of two high-profile programs at Lily (LLY) and Johnny John (JNJ). Here we can see global cases with a 7-day moving average. I do not think complete lockdown will be the “go-to” action this time around but we are seeing precaution being taken in Europe once again. Here is a link from BBC: France has instituted a curfew. A state of emergency has been declared in Madrid. Partial, four-week, lockdowns have been instituted in the Netherlands. Germany has enacted new rules on arrivals from high risk countries. Italy has mandated face masks outdoors. These are just some of the examples.
This is just going to be the way it is until there is a vaccine that is available worldwide. Until then, the recovery is going to be slow and uneven. The site Track the Recovery has great information that is a must see. In particular, the data around consumer spending in the US is fascinating. We are a country of people who love to spend money. If you give an American money, we are going to spend it. Despite everything that has happened in the past seven months, as of September 27th, spending by all consumers is only down 2.3% from January. Imagine the fire that could be ignited by a Biden win and an all Dem legislature!
The problem is where the money is being spent. “Mom and Pop” are hurting. Small business revenue is down 23.2% in the same time frame. The amount of small business that are open is down ~24%. As an extension, as of October 9th, total job postings in the US are off by ~16%.
This all sets the stage for further stimulus continuing to be a “when and how much” issue, not an “if” issue. I do not think there are people left who think that we are not going to get a big bill. At this point it’s just a matter of timing. And if part of that bill involves putting money in people’s pockets directly, we know what’s going to happen to it.
Is it any wonder that equity markets in the US are trading near all-time highs? Yes, last week was a bit of a stalling week across the board but the stall is near the highs. I am hard pressed to understand why that can’t continue into the end of the year. I have said often in conversations that I can see a world where the S&P 500 is much higher in the next two years while the unemployment rate is high-single to low-double digits. The only question is who will lead.
I am still in the growth camp based on trends and momentum. My blended momentum model favors this view. Look at the funds at the top of this list. Aside from the Qs, which is clearly growth, it’s a sweep across market caps. I own all four! I also think that not having an allocation to innovation at this time does not make sense. I have made the point many times for clients and here. That is also a growth theme.
Yield plays are under pressure which makes sense since in a slow growth economic environment, there is a risk that the dividends will be cut.
I am also still firmly in the rising inflation camp. If the base case is a “blue wave” under a Biden White House, I do not see how we do not get an inflation spike. I also see an inflation spike if the President were to hold the seat…stimulus is when, not if in my book. If this plays out, there is a high probability that the 10-year down trend in commodities is coming to an end. My guess is that portfolios don’t have enough exposure here. I do not see many models with an allocation to commodities.
If my thesis begins to play out, the CRB Index will likely break through resistance at the 450 level and could easily run another 15% (conservative) to 40% (aggressive).
To recap:
Economic growth remains slow and COVID will be an issue until there is a vaccine…
…Opening the door to restrictions such as what we are seeing in Europe now…
…Pushing a recovery further into the future…
…Requiring more stimulus in the US and around the globe…
…Which we know the American consumer will likely spend!
This is the roadmap that keeps me bullish on equities with a leaning toward growth stocks. But I think the big outperformance could come from being early to the commodity trade. In particular the ags, which I have discussed numerous times and will continue to do for as long as it makes sense.
But here is the thing…this is largely the consensus view. I think the upside kicker comes from the upset. Either the president keeps the White House or the Republicans keep the senate. Then we have stimulus without the increased taxes that the Veep has promised. This is arguably the most bullish scenario for assets.
The scenario that continues to scare me is the one where Biden wins by a small margin that allows Trump to contest the results and refuse to leave office. My friend Mike continues to do good work on this topic.
I truly do not know how any of this will play out. I will say that I am positioned for the base case, a “blue wave”, but with a stagflaiton (not reflation) view. I would be happy to see the surprise “upset” play out (purely from a portfolio perspective, not political. I do not share my political views). Should the contested election scenario come to pass, I probably don’t have enough cash or protection right now but I will continue to keep up on Mike’s work as a guide.
The next few weeks are going to be interesting!