It'll all be over soon

As the candidates sprint towards the conclusion of this most unusual of election years, betting market Polymarket says the odds of a Trump victory are about 60% (at the time of writing) with the likelihood of a GOP sweep about 40% and a Democratic sweep the only scenario that’s actually unlikely. A Trump victory should be positive for Financials due to deregulation, loan demand and a yield curve steepened by reflation. The dollar could benefit from a Trump victory if interest rates remain elevated to keep inflation at bay. Tariffs would also tend to push the dollar higher, as US production would be more attractive, bringing in foreign capital. Trump presents uncertainty on tariffs and there is only so much he can do regarding the corporate tax rate. Therefore, it could be that markets would be as happy to see Harris win as Trump. A Harris win would tend to support clean energy names, stocks exposed to China and managed care stocks. Now, energy is a tricky sector to handicap. If Trump wins, it could rise from the removal of restrictions on drilling—but that could lead to lower oil prices (which we might like, though not the oil companies). Then, too, a Trump victory could lead to harsher policies towards Iran, driving up the oil price. Tech is another sector whose fate is unclear under a second Trump administration. On the one hand, Trump might be less inclined to break up or otherwise regulate mega-cap tech. On the other hand, his vice-presidential nominee supports the more robust antitrust policy of the Federal Trade Commission led by Lina Khan, a Biden appointee. Additionally, Trump might argue that Big Tech censored speech to his detriment and needs to be investigated or broken up. (They say he’s unpredictable…) Typically, the market rallies after the election, but the unusually strong runup since August raises the prospect that this year will be an exception. If the GOP sweeps (at least partially priced in already), I wonder if it might be met with a shrug of the market’s shoulders. Contrariwise, if that’s the basis for the rally, a Harris win could lead the market to sell off, particularly in a Democratic sweep (not at all expected by the market).

A Trump administration might have unified government, while Harris would likely face divided government as the Senate is expected to have a Republican majority. Much of her legislative agenda would be tough to get through Congress—especially tax increases that she would use to pay for her proposals. But many of the signature issues of the campaign—trade, immigration, regulation, foreign policy—are areas where a president has significant freedom to act without Congressional approval. On trade, the burden of Trump’s tariffs might be less than it looks since many companies have already moved production out of China. Still, by one estimate, it might involve a 3.1% hit to S&P 500 earnings. When asked about tariffs in the abstract, 62% of voters support them as a means of boosting employment domestically. But when asked whether they would still support them if it meant a pair of blue jeans cost $10 more, only 34% said yes. It’s not clear, however, that a blanket tariff such as the 10% Trump has proposed would pass legal scrutiny. More likely that would be a bargaining chip. The China tariffs are more likely to withstand legal challenge, though the amount levied is debatable. In a GOP sweep, look for the expiring tax cuts to be extended though Affordable Care Act premium tax credits might be allowed to expire. As for new Trump tax cuts, the most likely to survive would be the “no tax on tips” and his 15% corporate tax rate for domestic manufacturers. Even in a GOP sweep, a tax bill would need to go through reconciliation in the Senate and might wind up quite different than what Trump proposes. On immigration, new restrictions could lead to potentially inflationary labor shortages in construction, hospitality and health care.

Everyone says the election will be very close, though that remains to be seen. The swing state polling margins have remained narrow, though a late-breaking wave could send all or most of them in one direction or the other. Still, if it is close and especially if the result is delayed or contested, it’s easy to imagine unrest. The GOP is focused on lawyering up for a contested election, with more emphasis on poll watchers than door knockers. Investors can take some comfort from the 2000 and 2020 experience, where political volatility did not translate into sustained market volatility. Even in the tumultuous year of 1968, which featured riots, protests and assassinations in the lead-up to the election, markets were orderly. So, who’s going to win? Will the high-propensity voters supporting Harris outweigh the lower-propensity Trump voters? Will the gender gap approach 25% for the third straight election? Will undecided voters turn up? (Research has found that 75% of undecided voters stay home.) Will Nikki Haley voters turn out for Trump? There were more than 150K of them in Pennsylvania and almost 300K of them in Michigan. What is certain is that a third of all outstanding Treasuries will mature in the next year and more than half in the next three years. With the three-month Treasury bill yielding 4.6% versus an average of 3.4% for marketable Treasury securities, Uncle Sam’s interest expenses will be going up. Still, the deficit may fall by $300 billion or more this fiscal year because tax revenues are likely to be stronger than expected and decreasing inflation will slow spending on entitlements. Finally, the Trump tax cuts expire at the end of 2025, amounting to a $4 trillion tax cliff. The election may have a big impact on corporate taxes since Trump wants to cut them while Harris wants to raise them. (Interestingly,  earnings per share have tended to hew to the long-run growth rate of 6.5% under a number of different rate levels.) Exhausting! As for me, I’m going to get my popcorn ready and keep that sense of humor near. It’ll all be over soon, plus maybe a week or two. 

Positives

• The chipper consumer The Conference Board’s Consumer Confidence Index rose from 99.2 to 108.7 in October, the biggest increase since early 2021. Respondents said jobs are plentiful, and the number planning to buy a car soon surged. The number expecting stocks to go up over the next year jumped, perhaps a sign of the wealth effect. Separately, headline PCE came in at 2.1% y/y while core PCE proved sticky, rising 2.7% y/y.
• If mortgage rates would only stay down The Case-Shiller home price index rose at 4.2% y/y in August down from 4.8% the month before. The broader FHFA housing index also showed 4.2% y/y appreciation in August. Pending home sales jumped 7.4% in September.
• GDP stays solid Real gross domestic product in the third quarter grew at a 2.8% annual rate, in-line with expectations. Public-sector spending was a big component, adding 0.9% to growth, with half of this coming from defense spending. Hours worked barely increased, suggesting that productivity grew 2% or more in Q3. Employment costs rose by 0.8% in Q3 against expectations of a 0.9% increase.

Negatives

• Payroll growth hits a pause US payrolls grew by an anemic 12,000 jobs against an expected 110K in the last unemployment report before the election. The unemployment rate remained at 4.1%. Strikes and the hurricanes appear to be behind the softness, with 512K people saying they were out of work due to weather, versus a typical 51K in October. Strong JOLTS and consumer confidence numbers reinforce that this weak report is not cause for panic.
• Manufacturing shrinks The ISM’s US manufacturing index fell in October, versus expectations of an increase. New orders and employment increased while production contracted further. The S&P Global manufacturing PMI ticked upwards in October above expectations. Meanwhile, construction spending rose slightly above expectations.
• Trade balance grows The advance goods trade balance widened to $108 billion in September versus $96 billion forecast. The change reflected an increase in imports and a decrease in exports.

What Else

Changing electoral habits The adoption of early voting by Republicans has been something new this cycle. This means voters have somewhere between a couple of weeks and a couple of months to get to the polls. It leads to higher voter turnout and closer elections where each side “banks” the early vote and then focuses on getting the uncertain and low-propensity voters.

That’s a lot of IOUs The five presidents with the largest average deficits as a percentage of GDP have been Lincoln (10.2%), F. D. Roosevelt (7.6%), Biden (7.4%), Trump (6.6%), and Obama (5.7%). The federal debt stands at nearly $35 trillion today versus just over $11 trillion in early 2009.

Polling versus betting It's harder and harder to poll the electorate in an era when many refuse to answer the phone from unfamiliar numbers—and, indeed, when cell phone numbers may no longer match one’s place of residence. Some say that betting markets are more reliable but there are problems with that too since people placing bets may not resemble the US electorate and may not even be American and since betting is an inherently distinct function from voting.