Don’t be short
A bit ho-hum today but a major market theme is developing. The Blue Wave chatter has morphed into a new phrase in the newswires – “Democratic Sweep”. This is an image from a US article titled “Wall Street prepares for the blue wave Democratic sweep“. The Bull market is getting ready to emerge.
Bloomberg carries a graphic showing Biden leading in six Battleground States.
Of course, we have learned that polls and bookies are unreliable, but it is worth noting that the biggest upsets in polling and bookie history, Brexit and Trump’s 2016 election, were both arguably a shock courtesy of innovative social media campaigns (Cambridge Analytica scandal) that cleverly manipulated wins for the underdogs – possibly/hopefully we have all grown a little bit smarter about that.
The relevance of my focus on the Democratic Sweep to us is summed up by the Financial Times, which carries an article talking about a Biden/Democrats win leading to a more robust economic recovery than expected, fuelled by additional government spending (a big new Democrat-led stimulus package) post-election.
Morgan Stanley talks about an “interest rate scare” and the negative impact it would have on the bond market (very good for equities). This chart shows you what Morgan Stanley is worrying about, US bond yields are on the rise with the 10-year bond yield at the highest level since June. An economic recovery and/or a vaccine could double rates from here – bad for bonds prompting a bonds to equities switch – good for equities.
This rise in bond yields explains the recent equity market strength (our market up 4.5% this week). Could this be the issue that, after four months, finally establishes the next major trend (currently sideways)? This is the ASX 200 (ASX: XJO) chart:
The bull market case is working on the following – these are the bull cases logical next steps:
- A Democratic Sweep.
- A bigger and better stimulus package.
- A new economic optimism.
- US GDP upgrades.
- Global GDP upgrades.
- A peak in unemployment.
- A rise in inflation.
- Higher interest rates (Morgan Stanley’s interest rate scare).
- Bond prices falling.
- A bond to equities switch.
Throw in a “Trumps gone” relief rally, an end to trade wars and protectionism, collaboration with China and Mexico (who account for 19.6% of US exports and 29.6% of US imports), a return to foreign policy with integrity, and a stock-market that doesn’t have to put up with the risk, volatility and unpredictability of midnight tweets and suddenly you don’t want to be short the equity market.
As an example of the ‘sweep’ assumption, one US market strategist has designed what he calls a “Biden Blue Portfolio“. It includes – railroads, home builders, building contractors, and engineers, manufacturers and material suppliers, broadband network providers, utilities, autos, medical suppliers, and innovative technologies.
If true then market themes would change – An economic recovery would also involve different equity market themes the most obvious one of which you would assume would be a switch from COVID-19 beneficiaries (tech, online retail, stimulus beneficiaries) to more cyclical recovery and oversold sectors again (energy, financials, REITs, travel, tourism, cyclicals). We have only just given up on that as a trade, it is a bit early to adopt it again, but we can’t rule out these themes coming back onto the radar at some point. We’ll handle it when and if it happens.
Virus – The one fly in the ointment for the Blue Wave rally is the Winter Wave in the northern hemisphere. It is pretty much out of control with a lot riding on a vaccine. Cases rose in 23 US States yesterday. France and the UK are considering more significant restrictions. We need to keep on eye on the economic damage that could bring without a vaccine.
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