Whilst Biden has several pathways to achieve the magic number of 270 (he’s on 264 at the time of writing) – markets have priced in a Biden Presidential victory.
But it won’t be the “blue wave” most poll predicted… so what does that mean for stocks, bonds and the US dollar?
It’s very important we balance the near-term ‘optimism’ in equities with what we see with leading macro indicators such as gold, the US dollar index, treasury bonds and credit default swap spreads.
For example, whilst bond investors are typically early, over the long-run they are generally right.
Hands up if you think we will have V-shape recovery?
I don’t.
Never have.
I struggle to see how we have anything remotely like a “V” in absence of an effective (and widely distributed) proven vaccine.
Despite the bleak macro picture painted by bond (and gold) markets… equities want to go higher. Put another way – thanks to Fed money – the divergence between Wall Street and Main Street continues to widen…
In my experience, the bond market is typically right with its long-term forecast… but it’s also early. By contrast – equities are late. Today the bond market is less than optimistic…
The market has been rallying largely on the hope of a quick ‘v-shaped’ economic recovery.
Or has it?
From mine, most mainstream headlines are taking that narrative.
But maybe there’s another school of thought…
For example, could it be the case that regardless of whether this recovery is “V”, “U”, or “L” shaped – it’s irrelevant to the stock market if the Fed has their back?
The yield on the 2-Year Treasury was 1.4% two weeks ago… today it’s 0.65% (at the time of writing). The 10-year yield fell from 1.55% to 1.02% over the same time frame – briefly falling below 1.0% this week. This is not normal. And it’s not healthy….
The Fed did largely what I suggested they might (i.e., reduce rates by 50 basis points) – but the market isn’t buying it. It’s not every day you see the Fed cut by 50 basis points and the Dow Jones fall over 700 points….
Jay Powell (and the Fed) have been steadfast on holding rates the past few months. However, given the emerging threats to global (and U.S.) growth (with CoronaVirus) there is perhaps scope for the Fed to reconsider…
