The biggest risk to markets right now is toxic politics which Trump has assured us will endure before, during, and after this election...
Gamblers are wondering, what will lead this next rally leg higher - cyclicals or momentum? The answer is neither, we have no leadership in markets or the White House.
I listened to an interesting analyst on Bloomberg this morning (no video sorry) saying that any real stimulus is several months away, given the current political quagmire. She also said that even the Democrat package of $2.2 trillion is inadequate given the rising economic deflation. If Trump wins the election, he becomes a lame duck president who will never pass another tax cut again. If Biden wins he has to wait until inauguration to pass a middle class stimulus package, assuming he can get one through Congress. Which means that best case scenario, real reflation won't come until mid first quarter 2021.
Pending riots.
As we know, markets always "price in" the future ahead of time. Which is why they are pricing in reflation now, given Biden's massive lead. It appears that many people remember 2016 when Trump and his tax cut got elected and the market ripped higher led by cyclicals, even though the tax cut was over a year away. The difference is that back then the economy was not in a depression and in dire need of middle class stimulus NOW.
Which is why gamblers are taking an asinine risk betting on asset reflation while economic deflation is increasing by the moment. Of course this week yields are backing up as the bond market got sucked in to this new Ponzi reflation rally, caused by the spike in Joe Biden's election chances:
"A victory of Democratic nominee Joe Biden in the U.S. presidential election could herald the start of a rotation toward parts of the equity market that have been left behind by the rally"
However, we've seen this movie before, and each reflationary impulse grows weaker and weaker. The last time yields backed up, cyclicals peaked and crashed back in June. Since then they have been making lower highs:
Could this fake reflation rally go on for a while longer? Sure. But one should note that the equal weight S&P 500 peaked on the third trading day of September. Which is today in October terms. Those two gaps will get filled sooner rather than later.
What this all points to - headlines and algos aside - is a market that is approaching third wave everything down:
Value / cyclicals:
Momentum / Tech:
"Safe havens"
And gold, which peaked back in late July when the stimulus ran out.
Could gold catch a bid at the beginning of a major stock selloff? It did back in March, but it soon joined the downside party.
