Markets are becoming increasingly skeptical son the possibilities of a “Democratic sweep” in the US elections in November. And that’s bad for almost all asset classes.
When the figures from Democrat Joe Biden in polls, numerous strategists began to talk about the idea of a “blue wave,” in which their party would retain control of the House and win the Senate. That outlook could be favorable for the markets, as a Biden presidency is seen to increase the odds of a new round of fiscal stimulus.
But now analysts say the chances are high that the Senate will remain in Republican hands, making approval of a new flood of cash less likely. A combination of Republicans retaining control of the Senate or having stimulus delayed until after the election will hurt economic growth through the first quarter, according to Bloomberg strategist Vince Cignarella. Add to that the current stalemate on stimulus, which leaves almost no chance of a deal before the election, and is the recipe for a market recession.
“Without a fourth fiscal support, it’s all about Democrats sweeping the Senate for a meaningful package. “said Dennis DeBusschere, a strategist at Evercore ISI in New York, referring to a fourth round of stimulus. “With odds of a 57% Senate sweep, anything can happen.”
Monday’s market action looked a lot like a “stimulus trade” reversal betting on a fiscal flood that will lift cyclically-oriented stocks and fuel inflation. The Nasdaq 100 gained 3.1% on Monday, driven by a 6.4% rise from Apple Inc. and a 4.8% rise from Amazon.com Inc. The advance once again outpaced value stocks and equities. Big ones outperformed small ones, while the dollar rose.
At the same time, publicly traded fund Invesco Solar, in a sector that would benefit from a Biden presidency, fell 3.4%. The bond market shows signs of concern over reflation trading bets.
“The moves at Amazon and Apple are huge and have a significant impact on the Nasdaq 100,” DeBusschere said. “And many people pointed out some weird option activities. But do not underestimate the impact of the fiscal collapse in the internal aspects ”.
Not everyone is worried. RBC economists Tom Porcelli and Jacob Oubina have said they are not sure further stimulus is necessary, an idea backed by Morgan Stanley strategists, including Mike Wilson.
“While the additional fiscal support would likely help growth and inflation over the next 12 months, we believe it is important to recognize that a strong macro recovery is already underway,” the strategists wrote on Monday. “Also, this recovery has accelerated without additional fiscal support that most (including ourselves) think would come a month ago.”
Still, everyone from JPMorgan Chase & Co. to Credit Suisse Group AG has pointed to the possible pro-market effects of a democratic sweep that boosts markets.