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Market Strategy 9/28/2020

  • John Stoltzfus
  • September 28, 2020

Que Sera Sera

Once the US Election is decided, market focus will return to economics and earnings
Key Takeaways
  • We discuss four possible election scenarios and their likely impact on equity markets.
  • In addition we discuss the outlook for the dollar, gold, and inflation in the weeks ahead.
  • Last week’s economic data pointed to a robust housing market—particularly in new home sales.
  • Economic data this week includes consumer confidence, revisions to Q2 GDP, and the final payroll report before the US election. 
voting calendar

With Election Day just 36 days away we are asked many times throughout the trading day about how we’d expect a number of scenarios to play out should they be realized.

This week we look at a number of questions that Oppenheimer’s equity desk has received from its representatives in institutional sales and from the financial advisors of the Private Client Group. We consider four frequently posited scenarios and provide in short form how in our view the equity market might react to each.

In no way are we suggesting that the outcomes listed below will actually occur. Rather only that they might play out this way in consideration of the platforms the political parties have outlined thus far. These views are not to be taken as allinclusive and encompassing but rather short form responses derived from our experiences with the markets over many elections (both on the local level as well as on the national level) over the course of our nearly four decades in the markets.

As strategists we do not purport to be political analysts or political pundits nor do we advocate how any of our readers cast his or her ballot. Consider our responses to these questions as the views of a professional investor from a politically agnostic position.

Quotation from Aenean Pretium

Ultimately the market’s vote comes after the election as it judges the effects of political policy on the economy.

Some Possible Election Outcomes

Scenario #1: Biden wins the Presidency and the Democrats gain control of both the House and the Senate.

We regard this as the worst case scenario for equity markets as it would curtail to no small degree the checks and balances that demand negotiation and compromise among opposing parties across the fabric of the political landscape that stretches across the House of Representatives, the Senate, and the White House.

In such a scenario we might expect the equity market to respond to such an across the board sweep by the Democrats in the upcoming election with a 6% to a 10% decline in a short period of time on concerns that too much legislative power would be concentrated among the Democratic party and that it could present a number of risks including:

Higher taxes for corporations and taxpaying individuals could sour business and consumer sentiment and spending, lessen the competitiveness of US corporations from a global perspective, dampen opportunity for investment and innovation and potentially saddle the nation already sizably burdened by debt incurred in responding to the Great Financial Crisis and the Covid-19 pandemic with even more red ink to fund a number of social programs instead of incentivizing job creation that could deliver prosperity and feed tax coffers.

Scenario #2: Trump wins re-election, the Republicans hold control of the Senate and the Democrats retain control of the House.

In this scenario the political structure of the House and the Senate would remain broadly unchanged and likely produce less uncertainty for the market to digest than would Scenario #1.

In such a scenario the market might rally 4% to 6% near term considering that the current administration has had a broadly business-friendly stance over the past four years, led efforts that resulted in the first tax reform in 38 years, and oversaw a drop in the unemployment rate to a 59-year low in the months before the disruption of the global and US economy caused by the pandemic. The market’s substantial rally from the low on March 23 appears to acknowledge that the current recession was caused by the economic shutdowns, which were put in place to stem the spread of COVID-19 rather than by pre-Covid policies.

Scenario #3 Trump wins re-election the Republicans sweep both the House and the Senate.

This scenario in our view is the least likely of the three scenarios presented to us by the equity desk. Similar to Scenario #1 the market might respond negatively or at least not as positively as it might respond to scenario #2. In our experience the equity markets feel most comfortable when the House and Senate are not controlled by just one party. In our view we find the market feels comfortable with: checks and balances in government; hard won negotiations; and even political gridlock—rather than handing any one party too much control. The equity market is representative of individuals, institutions and other entities of diverse political beliefs and stance.

Scenario #4 Trump wins; Democrats retain control of the House and take the Senate

The market might initially trade flat near term as it sorts out how far from or how close to center the Democratic victors in the Senate would be. The biggest political worry so far exhibited by the market would appear to us to be that the Democratic Party might pivot left toward the progressives after the election.

After the election with results officially confirmed, we’d expect the equity market to revert to its central focus on the economy, corporate revenues and earnings, monetary policy, and fiscal policy.

Ultimately the market’s vote comes after the election as it judges the effects of political policy on the economy.

Below are other related ideas that the equity desk has run by us at the start of the week.

Other Topics of Interest

Look for the dollar to weaken further as the world moves towards a post-Covid-19 environment. Economic data and overall market performance since March 23 through last Friday point to an economic recovery ahead stateside and globally. As an economic recovery takes hold look for the dollar to fall against developed and emerging international currencies as stateside demand for foreign goods picks up. Dollar weakness should increase US multinational competiveness as well as provide a boost to performance of international investments held by US investors.

Reflation seems more likely than worrisome inflation even as the economy gains traction. Secular trends of technology and globalization which are counter inflationary remain deeply embedded in the global and US economy. Beyond that vigilance practiced against inflation by the Federal Reserve and central banks around the world over the past 40 years appears unlikely to subside in our view.

Information technology, consumer discretionary, consumer staples, communications services.

After a sizeable run-up this year gold has begun to lose momentum and luster as a safe haven asset as signs of an economic recovery ahead and the potential for arrival of an effective vaccine to stem the spread of the pandemic appear more likely.

Gold traded at $1861.58 at the close on Friday, September 25, down from its recent peak of $2063.56 on August 6. Gold has benefited from the “safe haven” trade for much of the year, with its recent run-up likely reflecting more a “store of value” trade—tied to concerns held by some investors about the potential for inflationary pressures eroding the purchasing power of the dollar.

In our view its recent move lower may reflect a mix of: rising investor appetite for riskier assets; a modest rally in the dollar; and expectations that inflation will remain contained while deflation is averted.

John Stoltzfus of Oppenheimer Asset Managment Inc.

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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