October 26, 2020
Stocks are getting hit, to open the week.
With eight days until the very high stakes election, the market seems to be coming to the realization that a second fiscal stimulus/ aid package isn't coming.
With respect to the stimulus, both parties should just take the deal in front of them, and then work to reallocate funds (to the extent they can, to meet their own policy objectives) after the election. In the event of a split Congress (highest probability), both candidates would not see another stimulus penny, unless the economy melts down again.
On the election front, what are the prospects of a drawn out vote count, or even contested election?
These scenarios would likely come into play if Trump were to win the key toss up states. Why? Among those states, six out of eleven require that mail-in ballots only to be postmarked by November 3rd (PA, NC, OH, MN, TX and NV). That would create a window of several days where there would be an unknown outcome. And if the election day outcome were overturned with mail-in votes, it's pretty safe to say the election would be disputed, with the potential of ending up in the hands of the Supreme Court.
Now, as we know, stocks are not only a barometer of confidence, but also can influence confidence in the economy. With that, stocks test this big trendline today — the line coming in from the March lows. This chart will be key to watch in the coming days.
While down 2% to open the week looks shaky for stocks, there does not appear to be a significant "flight to safety" underway. Gold is flat on the day. And the 10-year U.S. yield (Treasuries), which traded as high as 87 basis points last week, holds in around 80 basis point this afternoon. So the bond market, which has been reflecting an improving economy, isn't telling a very different story to start the week.