Week of October 21
T - 2 weeks until the election. 6000 by Halloween?
Recap of last week
Last week we forecasted weakness in equities, and were wrong. We missed out on a 60bps rally. Its been an incredibly frustrating low volatility grind up in 3Q this year, I think that will change in the coming month.
We did short ZB, long duration bonds on Thursday before retail sales and TLT gapped down 1.5% the next day. We believe the rates space will be extremely volatile and active through year end as the two candidates have vastly different policies they would like to enact.
Everyone’s question right now is of course is the pre-election sell-off canceled or not?
We usually get a correction in October every election year, but mysteriously have not had one this year. Should we ditch the idea? First of all I believe two reasons why we haven’t had a pullback yet.
The Fed jumbo cut. There is no precedent for a 50bps first cut outside of crisis moments (COVID, GFC etc). Equities chose to interpret this as bullish, and bonds said it was bearish. This brought in many equities inflows as it helped smooth out volatility and took the starch out of a bearish September which has been extremely weak in recent years.
The election. It is important to note that this year the two candidates are perceived to be extremely different in regards to economic policy. One is broadly seen by the market as very bullish growth/economy/stocks (Trump) and the other (Harris) seen as the opposite of that (populist, pro tax hikes). I believe the reason we haven’t seen much volatility this year is Polymarket. This is the first election where election gambling sites have been in use broadly. Right now the status quo seems to be recognizing it as a legitimate, semi-accurate reflection of the polls and they show Trump (allegedly bullish stocks) as a huge front runner. This removes a large amount of uncertainty and the stock market likes that alot. I believe Polymarket is heavily flawed when being used as a proxy for real-time odds but right now the market believes otherwise. We will see if that is a mistake come election day. However I do believe Trump is a slight favourite, but I think 52-55% odds are more appropriate.
So I think you have these two major factors at play, the Fed cut and Polymarket that have dampened volatility in October this year. Two entirely new factors that the market has not really dealt with before. So is the correction now cancelled and we just rally into year end?
Next move for markets