Thursday, October 6, 2022

U.S. Stocks Surge: Green Tsunami As China Reopens


Investors have remained cautiously optimistic that Congress will agree on fiscal stimulus measures aimed at the economy’s most struggling parts. However, there are few indications a deal could be reached before Election Day.

The rise in equities came despite roadblocks to further near-term US fiscal stimulus that appear to remain firmly in place. Senate Majority Leader Mitch McConnell suggested that Democrats insist on an “outrageous amount of money” while also noting the challenge of negotiations given the proximity to the election. Meanwhile, House Speaker Pelosi indicated Democrats would not support a stand-alone bill for airlines without a broader fiscal package.

All but a minor roadblock for investors, so it seems, the markets continue rallying on optimism that the package will get done, be it a piecemeal one before the election date, which will undoubtedly bridge the gap, or the more expansive post-election top-up policy boost. But at the end of the day, investors are reveling on the Blue Wave rally bus where the first order of the day come Nov 5 will to open up the stimulus taps, and stocks are rallying in kind.

The seemingly positive ramifications of a possible Democratic clean sweep in the US election continue to play out globally, with ESG/renewable names, as well as cyclical/infrastructure, plays continuing to outperform. Looking further out, the pro-fiscal / increased regulation narrative of a Biden presidency should prove to be supportive for European markets, as investors sell out of tech/momentum names given the heightened regulatory risk and switch into more infrastructure-exposed sectors/regions—though I would exercise some caution at current levels, with a lot now priced into markets for a ‘blue sweep.’

It’s getting easier to understand why investors are moving towards pricing a win by Democratic candidate Joe Biden. On Wednesday, a poll published by Quinnipiac University put Biden ahead in two key states, Florida and Pennsylvania—by pretty insurmountable margins and clearly into ‘Blue wave’ territory.

Regardless of the election outcome, the new president will be focused on getting the US back to full employment, fast. In this modern era, the narrative could shift to increased deficit spending, higher long-end rates, and higher inflation expectations. These macro factors support cyclical stocks, but it could be a bumpy ride as heightened volatility typically accompanies new market regimes. Ultimately the stimulus boost gives way to corporate tax hikes and market return focus on earnings.

The US election trade for a Democratic sweep started last Friday—stocks down on corporate tax fears and recovering expectations for a more massive eventual stimulus. was down on expectations for unattractive oil and gas policies and recovered on stimulus expectations, while bonds bear steepened on likely higher fiscal deficit spending. 
From here, the question is whether expectations have gotten ahead of true probabilities. Caution is warranted when the actual event is still so far away. On the other hand, the market has yet to price out election uncertainty risk premium, which may remain a supportive risk. Most importantly, for growth assets like oil, House of Representatives Speaker Pelosi has indicated that Democrats won’t wait until February to pass the additional stimulus if the election goes their way.
US House Speaker Nancy Pelosi says a Congress must pass a comprehensive stimulus deal, not piecemeal packages. Pelosi also says the Democrats and Republicans are still far apart on funding for states and local governments. The rates markets haven’t reacted much, which suggests positioning is perhaps cleaner after the recent volatility. At least some stimulus is likely coming by the Dec. 11 date to keep the government funded regardless of the election outcome (signaled a couple of days ago by Pelosi herself).

The Blue wave as actually a Green Tsunami

The market is rapidly resetting to a Democratic clean sweep with higher fiscal spending and an emphasis on renewable projects where ESG/renewable names and cyclical plays will continue to outperform.
Fiscal cliffs can be avoided with ove$2.4tril of government firepower yet to be deployed, but Vol markets see US election uncertainty persisting.
Vaccine potential remains only 55-60% priced according to UBS strategy; despite rising cases and mobility restrictions, risk markets remain resilient – this suggests lots of dips will continue to be bought as the vaccine will be viewed as the ultimate recession plugger. 
Rotation from stay-at-home winners to quality cyclicals with superior earning momentum is the next market narrative as investors sell out of tech/momentum names given the heightened regulatory risk and switch into more infrastructure-exposed sectors.

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