No matter who wins the election, the stock market is going to go up

Outlook:

This week holds a deluge of fresh data, including the slew of PMIs, including the US versions, and the Friday October jobs report, prefaced by ADP on Wednesday and Challenger on Thursday. The Fed meets on Wednesday with nothing much expected, but you never know. On the central bank front, the RBA meets tomorrow, so results late in the US night.

In FX, the only thing anyone can say for sure is that we need to expect volatility. We think we see the dollar losing the safe-haven bid and the yields indicate no giant surplus of fear, but yields are terribly unreliable these days.

At the risk of being wrong again, we're sticking to our idea that no matter who wins the election, the stock market is going to go up. It may already have started. Still, unless there is a statistically unlikely landslide, we won't know the election outcome until Friday at the earliest--and maybe longer. If it turns out Pennsylvania is the ultimate swinger, we won't know until 5-7 days after the election; the state does not even start counting until after polls close at 8 pm on election day. Pennsylvania is beset by many problems in addition to not being able to start counting at a sensible time, including mail delivery deliberately screwed up by the Trump White House, various court cases and a mule of a statehouse. In contrast, Florida is counting away and Arizona is a model of tabulation excellence. We will have a nearly complete count from both states by midnight on election day.

The forecast of a rising equity market rests on these assumptions: uncertainty will be gone. Uncertainly is not risk, but it's a kissing cousin. Second, the stock market is still the only asset class with a decent chance of a return; bonds are lousy and metals, even gold, are unreliable and hard to trade. Third, if we get Biden, we get a proper pandemic plan, a stimulus package and infrastructure spending. If we get Trump, we get more chaos and incompetence, but the tax cuts and deregulation stay. Why anyone would think violating environmental regs is a good thing or "conservative," but it's sadly true that some insiders can make a bundle.

So, if our Trump-era model stays in place, the coming risk-off means dollar sellers can re-emerge. A tiny bit of evidence comes in the form of the peso doing better, implying a Biden win will undo or re-organize Nafta II, or otherwise restore better relations.

A powerful headwind is the looming contraction of the eurozone economy due to new lockdowns, with the UK suffering perhaps more than anyone with a drastic lockdown. The UK newspapers are chock-full of stories about how Boris is under siege for having done too little in the first place (sound familiar?) and his popularity falling down a hole. Still, Brexit talks are resuming ahead of the next EU deadline of Nov 16 when the EU meets again, and there is some smell of kicking the can down the road on fishing rights. The rise in sterling that started the minute London opened overnight may imply a Brexit deal is more important a factor than economic data or the new lockdown.

To bet on the dollar resuming its decline and NOT getting a safe-haven bid is to bet on Trump not being able to argue that he won the election and all or some of the mail-in ballots, whatever their date, are fraudulent and/or should not be counted. In other words, a clear and decisive Biden win tomorrow night.

This is a highly risky bet--tigers and stripes. Trump and cronies plan to make a stink. One of the only roadblocks to the stink casting a pall over everything is the Senate race. Again, votes will be contested, but a clear win for the Dems in the critical places makes the job of contesting more urgent but also less likely to succeed, because it signifies voters did not split the ballots and just voted straight down the Dem line starting with Biden at the top. This is the referendum-on-Trump idea. Analysis of whether voters split the ballots will be the bigger debate as time goes by. TV interviews with former Trumpies who are not nitwits indicate they are still hardcore Republican but "Republicans against Trump." In other words, they will split the ballot. Only the hold-out hardcore Trumpies will vote the whole ballot for one side, and they are a minority.

Returning to the stock market idea, a fun tidbit: a Reader sent us this calculation on the election/stock market relationship: "The Stock Market Presidential Election Predictor states that if the stock market as measured by the S&P 500 rises in the three months before the election date the incumbent party will win, and if it falls the incumbent party will lose. It has an 87% success rate since 1928 and a perfect rate after 1980. (See the chart below) Now, as with many models, the data can be tweaked with slightly different starting and ending dates that can provide different answers."

Another version by Sam Stovall has the start date as "the last trading day of July, July 31 this year and the end date is the last trading date of October, October 31 this year. The S&P 500 closed on July 31 at 3271.12 and closed on Friday October 31 slightly lower at 3269.96, predicting that Trump will lose."

"The model variation used by Ryan Detrick of LPL financial begins using the close on the first trading day of August, which is 3294.61 on August 3 this year and ends with the close on election day. So far, if the S&P does not recover 23.49 points by the close on Tuesday, Trump will also lose on this variation of the model. If the S&P recovers to close above 3294.61 on election day, the two variations of the model will be in conflict which means we will need to rely on something else."

Politics: Joe Biden still leads in all the national polls by 6-12 points or an average of 10, and needs only to win the two upper Midwest states that Hillary lost (Michigan and Wisconsin) plus Pennsylvania. and other pollsters show the combinations and permutations that could also work, such as Biden losing Pennsylvania (something the Republicans are trying to get by cheating as much as possible) but gaining Arizona and a few others. One reason to distrust polls showing the race tightening in Trump's favor is that pollsters weight non-college whites more heavily (on the assumption that is the Trump demographic profile), according to Reuters.

Here's the reasoning: non-college white men are the Trump base and they don't do polls. "As a fix, many polls, including Reuters/Ipsos, installed an education "weight" to calibrate their survey data so that it better reflects the education levels of all Americans. What that means is that if a poll gathers a smaller number of non-college adults than one would expect given their population size, the poll will automatically give their responses a greater weight so they are properly represented in the survey. Is that good methodology? Maybe yes, given that other Trump supporters are "shy" or "hidden," meaning they won't admit they are voting to Trump because they know he's a jackass. Note that there are "shy" Biden voters, too, especially in traditional Republican stronghold states (like Arizona).

We still won't know tomorrow night who won. The traditional TV news anchors, backed up by teams of statisticians, are wary of announcing much of anything except the data. We are all going to watch into the wee hours, anyway. It looks like the Republicans were closing in on the Dems' lead on Friday, but then that started to recede by Sunday. We still have the prospect of a Republican surge of in-person voting tomorrow.

The WSJ notes Trump can still win. How? "The map would start with the president holding on to five fundamental contested states: Florida, Ohio, Georgia, North Carolina and Iowa. If he then could also hang onto Pennsylvania and Arizona, he'd win the Electoral College vote, even if he loses the swing states of Michigan and Wisconsin. Mr. Trump doesn't have a lot of margin for error, and Pennsylvania is the key." But Pennsylvania is a union state and unions like Biden, as well as it being his home state (although historically that doesn't mean much). Also, "big demographic changes in Georgia open the way for a Democratic surprise—which is one reason Mr. Biden plans to be there Tuesday."

While we like polls, we never forget we flubbed it in 2016, along with nearly everyone else. This time we still think the polls are right and Biden should win, for many reasons. The first one has to do with the Education of the Pollsters. They know they made mistakes last time and are trying to fix it. One tactic is to change the margin of error. This was a killer in 2016, with Clinton's lead in the swing states perilously close to the margin of error, which did indeed rise up and strike her down. The rest has to do with the character of the contestants.

Biden is likeable and Clinton was not, reducing turnout. This time turnout is exceptionally high. Clinton never got 50%+ approval ratings and Joe consistently does. No president with an approval rating under 50% gets re-elected, and Trump's approval rating has never risen to more than 47% in 41 separate polls since Feb 2017 (NCB/WSJ). In fact, 51% of adults (not "likely voters") say they would never vote for Trump. Only 40% feel that way about Biden. The Sunday polls shows Biden has a 10-point lead overall and a 6-point lead in 12 "battleground" states.

Biden was not blackened by the pseudo-scandal the Trumpies tried about his son Hunter being corrupt. The mainstream press rejected the story for lack of verification and scummy sources. In contrast, Trump had the FBI itself questioning Clinton in 2016, a big drag on turnout if not a mind-changer.

Biden is a Good Man while Trump is a misogynistic, racist, lying, incompetent, draft-dodging, tax-evading fraudster who squandered his inheritance and declared bankruptcy six times.* He and his family are forbidden to have a charitable trust because they misappropriated funds in the first one.

Biden has policy plans, including the infrastructure promise Trump made in 2016 but never kept, while Trump has no plans and lies about having plans (like a replacement for ObamaCare that would exempt pre-existing conditions).

The financial world is backing Biden, not that the average voter is aware of that.

Biden will address the pandemic instead of lying about it as not serious and disappearing any minute, as Trump does.

Biden accepts science, including climate change science, while Trump is a denier. Young people may be feckless but they prefer science.

Polls may be unreliable in many ways but not useless. That Biden leads in Georgia on Friday, if by only 1.7 points, is deeply meaningful. For those who don't know, Georgia is seriously redneck racist, anti-immigration, states-rights, gun-toting country. In Arizona and even Texas, the Dems have a real chance, if a slim one. The point: society is changing. One word we are not hearing these days is "tolerance," but it seems as though Trumpian mindless intolerance may have tipped the scales.

Let's hope so, because if Trump wins again, the country is the biggest loser. Even assuming a Biden win, Congress can take the full four years of his presidency fixing all the loopholes Trump slithered through. It's a big job.

• Bankruptcies are Taj Mahal (1990), Taj Mahal again (1991); two other Atlantic City casinos (1993); the Plaza Hotel (1992); Trump Hotels and Casinos Resorts (2004), and Trump Entertainment Resorts (2009). Source: Washington Post and PolitiFact.

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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