Traders wearing masks on the floor at the New York Stock Exchange.
Brendan McDermid | Reuters
What's next for markets? After the election, some old issues will re-emerge, regardless of whether Joe Biden or President Donald Trump won.
The rally is due to better earnings visibility
All traders agree on one point: The market rally is mainly due to the improbability of higher corporate and individual taxes in the next year.
"The Senate numbers from the 2020 election suggest that higher corporate taxes are unlikely, which gives us and others more confidence in EPS estimates for 2021," Citigroup's Tobias Levkovich said in a statement to customers. Like many others, Levkovich estimated that higher taxes could save at least 5% of income in 2021, but "that possibility has vanished," Levkovich said.
Back to the basics
"The good news is that the uncertainty over a very controversial election should be behind us soon, and investors can focus on the macro influences that will ultimately determine direction: inflation, interest rates, the availability of money, and the prospects for national and global growth "Tony Dwyer of Cannacord Genuity wrote in a note to customers.
In conversations with traders, various "old topics" came up again and again: the extent of fiscal and monetary policy incentives, China policy, and trade and the dollar. One major trend that any president will face: the prospect of a much bigger government.
Tax and Monetary Incentives: How Much?
The traders agreed that the Federal Reserve would continue to be accommodating and that Congress will provide some kind of fiscal stimulus, but there is no agreement on the timing or size of the deal.
"I think it is certain that the Fed will be extraordinarily simple for a long time to come … and I also think that it is certain that we will get fiscal stimulus." Jason Trennert, chairman of Strategas Research Partners, told CNBC.
Liz Young, director of market strategy at BNY Mellon Investment, said the markets are now dominated by momentum. "Both parties want an incentive," she told CNBC. "That will lead to a rally that will encourage positivity and the sequence of events. So if you get a tax package and vaccine in the same two or three month period, it is a huge upward trend in the stock market."
The good news: Senate Majority Leader Mitch McConnell said a stimulus plan before the end of the year would be the Senate's top priority, suggesting aid to states – a major stumbling block in previous negotiations – could begin.
Everyone will be tough on China
No matter who wins, attitudes towards China have tightened. "I think we fight with China no matter what," said Peter Tchir of Academy Securities.
Not everyone is convinced. "The world expects Biden to make China easier, I hope that's not true," said Kyle Bass on CNBC, noting that the dollar weakened against the Chinese currency when Biden appeared to be at the top.
Protecting vital US industries will be an issue under both governments: "I think there will be tremendous pressure to bring medical manufacturing home," Tchir told CNBC. "Why do we manufacture important medicines in China?"
Trade and the dollar
Indeed, many traders agreed that "economic nationalism" – which is bringing supply chains back to the United States – would also be an issue under the Biden administration.
"Biden's Made in America is the import substitution strategy that comes very close to Trump," said Marc Chandler of Bannockburn Global Forex. The differences between them, he said, "are more style than substance."
Trade deals are a different matter. Chandler noted that the US is officially leaving the Paris Agreement and said Biden will try to re-join the deal.
As for the dollar, both the import substitution strategy and the monetary and fiscal mix are suitable for a weaker dollar.
"We're going to have a twin deficit: we're going to have a budget deficit and a large trade deficit," said Chandler. "US interest rates are expected to rise to attract investors, but interest rates cannot rise much. So the alternative is to bring the dollar down. If the US borrows more, the dollar will fall." He also pointed out the strength of the Chinese yuan against the dollar.
Bigger government, no matter who is in the White House?
Regardless of who wins, many believe the 2020s "will be marked by bigger government," Bank of America said in a recent statement to customers. Among other things, a wider acceptance of modern monetary theory has been cited, which suggests that governments shouldn't worry about deficits and print money unless it becomes inflationary.
David Kelly from J.P. Morgan Asset Management agrees: "In today's environment of almost zero or even negative interest rates and massive purchases of government bonds by the central bank, we are seeing a step towards MMT."
Others cite the growth in environmental, social and governance investment, implying that investors are pushing for more societal change and increased government regulations.
At the moment a goldilocks market
For now, these general political questions are being put aside as traders celebrate the potential for a perfect scenario: a new president reviewing his ability to collect taxes and enforce more regulation.
"We'll have a much better economy next year than many people believe, regardless of who is in power," said Tchir. "We will really get the incentive that goes beyond band-aid, with a great infrastructure and attempts to repatriate jobs from abroad."
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