Flight to Safety? Not yet...

Macro Perspectives: Tue 27 Oct 2020

The week kicked off with Stocks getting hit, ~2% declines to end the day.

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, we should consider what the prospects of a drawn out vote count, or even a contested election are?

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 be postmarked by November 3rd (PA, NC, OH, MN, TX and NV) - creating a window of several days where there would be an unknown outcome. 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.

As a point to note, stocks are not only a barometer of confidence, but also can influence confidence in the economy. With that, stocks tested various big trendlines yesterday - the diagonal support line coming in from the March lows.

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. The 10-year U.S. yield (Treasuries), which traded as high as 87 basis points last week, held at around 80 basis points. So the bond market, which has been reflecting an improving economy, isn't telling a very different story to start the week.