According to the stock market, Hillary Clinton will not only win the election, but she will make it to the White House in a landslide. In an interview, Bank of America Merrill Lynch’s David Woo explained that the market is pricing in Mrs. Clinton winning red states that have been out of reach for Democrats for decades. Woo said:
“Since July 5, the S&P has gone up about 4.5 percent. We’re now at the midpoint mark of this 90 day rule. The last time the stock market was up this much at the halfway mark was when Ronald Reagan went on to defeat Walter Mondale in a landslide victory. The market is not only pricing a Hillary victory. The market is pricing in a landslide Hillary victory.”
The stock market is anticipating a split Congress, with Republicans keeping the control of House and Democrats recapturing the Senate. Which implies that the word compromise will still be a dirty word and Congress will remain in deadlock and Mrs. Clinton will have a tough time advancing her agenda.
By the looks of things, the stock market is in sync with the polls. Clinton has a narrow lead over Donald Trump, and there is a 59 percent chance of Democrats taking back the Senate. The expert shared:
“You have a Democrat president and a Republican controlled Congress which means you have gridlock in Washington. The market is pricing in this gridlock, meaning it’s going to be that much of the burden of supporting the economy falls on the Fed.”
Mr. Woo, who is head of global interest rates and foreign exchange strategy, went on to reveal that the gridlock in Washington will continue to make it harder to get agreements and policies on changes in tax policy or for fiscal spending. He said it is sad that lawmakers can not work together because those policies would boost the American and world economy. Woo went on to explain another negative impact that gridlock will have. He stated:
“It makes it hard for the Federal Reserve to raise interest rates very much, and that means the U.S. markets would continue to feel the benefits of the quantitative easing being done by other central banks. Central bankers in Europe and Japan have driven interest rates lower or negative, and investors have flocked to the U.S. credit and stock markets. That environment has led to the dominance of the risk parity trade, where investors see conditions that favor both stocks and bonds.”
According to the money expert, if there are drastic changes in the polls the days leading to Election Day, the stock market will react and become unstable. He shared:
“The market is pricing in gridlock and Goldilocks, and the gridlock is good for risk parity. The point here is as we go into Election Day, whether you’re basically supporting Hillary or Donald Trump, it doesn’t matter. History tells us volatility goes up in the final stretch. The VIX has always gone up in the final month. It’s a general rule, rather than exception.”
He predicts that if Mr. Trump miraculously takes the lead, the market will shake. Woo said:
“I’m not saying a market crash, but we could get a jolt, more than a jolt. Risk parity portfolios are favored by hedge funds and can be highly leveraged.The volatility market is underpricing the election risk.”
A new poll released on Monday showed that Mrs. Clinton is leading Mr. Trump by 7 points among likely voters. This new poll is evidence that Clinton’s convention bump is dwindling. Moreover, Woo revealed that as Clinton’s poll numbers rise and fall so will the market. He elaborated:
“My point here is there’s a very good chance Hillary’s lead is going to narrow and volatility is going to go up as we head into September and October. That is going to be a shock to the market, and risk parity trades hate volatility. We saw that on this past Friday — bonds sold off and stocks sold off. That’s the kind of situation that becomes self-fulfilling. Woo said there were two instances in the past five years where there was a big unwinding of the trade — in the 2013 “‘taper tantrum” and last August when China devalued its currency.”
He added:
“If you think about the most crowded trades in the world right now, the most crowded trades are risk parity trades,” he said. “The biggest positions are risk parity positions and it’s done on a very leveraged basis.”
Woo said looking at history it is clear that the stock market reacted in a positive manner when the presidential candidate won by a wide margin of Electoral College votes. According to Woo:
“In the 90 days leading up to the election, the S&P 500 (.SPX) was up an average 8.4 percent when the candidate won with a margin of more than 80 percent of the Electoral College.”
He went on to give few examples:
“Those instances were in 1964, when Lyndon Johnson was elected, 1972 with Richard Nixon, and both victories by Ronald Reagan in 1980 and 1984. But when the margin was less than 20 percent, like in the 1960 election when John Kennedy was elected, 1976 when Jimmy Carter was elected or in both elections of George W. Bush, the S&P averaged a slightly negative return.”
Woo concluded by saying that the vast majority of people on Wall Street see Trump as bad news for the market. They also believe that a Trump presidency means a trade war with China. He explained:
“I don’t believe that Trump is necessarily bad for business. The only thing we could say about a Trump victory is a lot more fiscal stimulus. If half the stuff he’s talking about is true, the economy would take off. This would be the first time you get a fiscal stimulus when you’re not in the middle of a recession. If we get a Trump clean sweep, this would be very bullish for the U.S. dollar but also very bearish for Treasurys.”
Although a Trump comeback is still possible, at this point most people do not see it.
