Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Macro Digest: Forget the clean-sweep
Steen Jakobsen
Chief Investment Officer
Summary: As someone who believed that Biden could do a clean sweep six week ago it may seem odd that I now, again, have changed my position. I still have a high conviction on a Biden win, but a far lower conviction that the Democrats have a chance of taking a Senate (so important as Congress must have both houses on the side of the presidency for any chance of major tax and regulatory reform).
- My take: It is far less likely than the current market perception that Biden wins a “clean sweep” (taking both houses of Congress and presidency), especially if the debate this Thursday sees Trump hammering Biden on Biden's intended tax increases. Below is a look at a Hoover report on the ugly impact on growth from his tax code and regulatory plans.
- Action: Buy post-election volatility - mainly in the mid-term VIX structure (VIXM:arcx @ 39.20)
- Why? The Democratic Party is already pre-celebrating an election victory and the market sees a high probability clean sweep scenario and smooth sailing to new stimulus measures. But the US is not ready to leave the keys to a political majority in my opinion. This is a big change in my position into the election.
- Reality: Whoever wins the US election, there will be no easy path to reforms, and certainly no healing of a divided USA in desperate need of moving forward. The mid-term election will be the gamechanger in 2022.
Here are are some reasons Democrats may struggle more than currently believed:
The Democratic Party is already allocating cabinet posts before the election! This is a classic Democratic mistake. Remember Hillary Clinton and her hubris? Link
The Biden tax plan is far more heavy (negative) for the economy than the "pipedream" sold by markets. Add to this a projected 10% drop in S&P 500 earnings from the Biden Tax plan as estimated by Bank Of America!
I have read hundreds of sell-side reports suggesting that a Democratic President is good for markets! But while the Fed can be expected to do what it always do, the Biden plan would reverse nearly everything that Trump did on taxation and deregulation to boost markets. But I will let the Hoover breakdown of Biden’s tax plan do the talking: Link.
The Polls are simply wrong (mathematically) – As resident quant Anders Nysten explains in our Q4 Outlook: US Election "...The typical polling margin is ±3% in state polls that can only ask a small subset of the whole population. Recent studies have shown that, when accounting for other possible errors such as the correlation between the state poll errors, the real-world margin of error should be twice as big. In practice, this means that some of the 2016 state polls would not have been able to call a winner within the uncertainty limits of the poll"
Now look at the polls below and consider potential outcomes given a more appropriate level of uncertainty: The shy Trump voters. Personally, I can see why there are good reasons to hide that you are a Trump voter, but let’s look at what one survey says:
What CloudResearch Found (link):
- 11.7% of Republicans say they would not report their true opinions about their preferred presidential candidate on telephone polls.
- In contrast, just 5.4% of Democrats say that they would be reluctant to share their true voting intentions — roughly half the number of Republicans reluctant to tell the truth on phone polls.
- 10.5% of Independents fell into the “shy voter” category, just a percentage point lower than how Republicans react to phone polls.
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