Which Way Is Up?

In case you haven’t heard there’s an election in the US this week. At the top of the list is the contest for President. You may end up reading this after Election Day, but few believe we’ll be sure of the actual outcome on that day, so I decided this isn’t too late to write…and maybe make a prediction.

I’ve spent the last few years writing this blog and attempting to stay out of the political discussion. As a Political Science major, it’s amazing I can be this exhausted, and this disappointed. Disappointed in the way this has turned into Us vs. Them, no matter which side of the us and the them you’re on. So I’ve been trying to think of what to write about without blatantly espousing for one side or the other. What did I come up with? Well, market analysis, of course.

I look at charts. I try to keep emotion out, except when I can’t take it anymore and I trade on emotion. When I do that, I generally accept that I’ll be wrong. So let’s discuss the chart, briefly, and then go into the why’s. The chart of the S&P, NASDAQ, or [insert broad equity index of choice here] says buy the dips. So on an objective basis, that’s what we should be doing. But what about the post-election moves? Well, rules are rules, so let’s see how to fit this into the current narratives around what happens after the election results.

Mini S&P Futures – Monthly Chart

If we read the above, after the election the charts say the probability is markets go up. But we’ve spent 6 months hearing how if one candidate wins it goes up, if the other wins it goes down. With a trend this advanced, it’s easy to discuss reasons it could go down based on who wins. But I’ve learned too many lessons the hard way. Those lessons usually are the results of breaking so many of my own Technical Analysis tenets.

So let’s try and actually find the narrative that makes this bullish opinion work, from both sides. We can start with either side. Let’s start with the incumbent, Donald Trump. It’s been said by many that a Trump victory is what’s needed for the equity markets to continue this run. We can see where this comes from, as much of the rally is supported by banks, trading firms, wealthy individuals, and family offices with money that needs to be put to work. And while many have stashed money in bond markets over the years for safe returns, rates are too low across the board to really make this a worthwhile position to take on a risk reward basis. Even rich folks want to return more than 0% to 3% based on the risk of the assets backing the bonds, from the US government to smaller municipalities to corporations. So this money is funneled to equities and it feeds on itself…like so many rallies do.

This audience is traditionally better served by having a Republican administration driving the bus. So based on that, it’s easy to see why there is a valid argument to be made for the continuation of the current leadership. Are there counter arguments? Of course…a lot of money has been printed recently. Not the usual Republican way of doing things, but hey, whatever works. There’s not a lot of evidence that the practice of feeding corporations and the wealthy will change with a re-election, so it’s easy to see how a Trump victory leads to a continuation of this ride higher. Anything else is pulling the rug out from under.

On the other side is Joe Biden, the challenger. Many narratives say that a Democrat in the White House will lead to a large sell-off in these markets. Now history doesn’t necessarily support this, as some of the largest bull runs have come with Democrats driving the same bus. Yet it’s an easy argument to make. Taking aim at corporations and rich folks by taxing all those winnings at a higher rate, supposedly printing more money than the other side, these are the things that drive arguments for a bear market. But if you’re making money, well it’s not quite as painful to pay higher taxes. Think about it…would you rather (as the kids game goes) pay $40 out of $100 in profits, or pay $10 on $50? Well looking at percentages only, it’s easy to say the latter. But if I’m only able to make $50 vs making $100, personally I’d rather have the $60 in my pocket post taxes than $40. That’s my math.

But how does the market keep going up under Biden. Well, if we can conclude that much of what has kept these markets afloat is an expansion of the monetary base, it’s pretty fair to say that a Biden administration will pump more money into the economy. It’s how the promise to support those suffering the most financially in a pandemic gets translated into more dollars floating around. But will those who need the money most actually be buying stocks with payouts? Probably not. Rent, food, clothes and all that. But it would be naïve to expect that the only beneficiaries of a monetary policy designed overall to help those in need will be confined to that audience. And we know that interest rates won’t fly higher in this scenario, so we’re back to the place for this money being equities. Yup, bullish.

Will it play out this way? Maybe not. Maybe the second Trump administration doesn’t really keep printing money. Maybe they do find their way back to Republican roots of tighter monetary policy. Maybe the rally that has, for the most part been confined to a small selection of stocks within the indices does run out of steam with a lack of new money.

And on the Biden side? Also not guaranteed, but it’s difficult to find a scenario where a Democrat led administration doesn’t keep the printers going and interest rates low. Now granted it’s difficult to imagine getting a mortgage refinance at less than the 2.75% I just got, but we still have positive interest rates. They could always go negative on a federal level, a la Japan which means I could refinance even lower next year. Negative rates are not something I’m in favor of, didn’t work for Japan, but that doesn’t mean it can’t happen.

So where does this leave us? Well, this blog is titled The Story Behind the Picture. This is what I see as ways for the bull market to keep going. Will I be right? That I don’t know. What I do know is that I’m not getting short again until the chart tells me to. Cheaper that way. Sometimes no trade is the best trade.

Please go vote! It’s your responsibility. And if you don’t, and your candidate of choice loses, please don’t bitch about it. You only earn that right when you take care of your responsibilities.