I try very hard, here at Deep Earth and in other places where I give my opinion on markets, to avoid politics. America is so polarized right now that whatever I say is just about guaranteed to offend around half of my readers and subscribers, which obviously makes no sense from a business perspective. That isn’t the main reason I avoid the subject, though. It is mainly because politicians have a lot less impact on a functioning capitalist economy and efficient markets than most people, and especially they themselves, think.
That is becoming evident right now if you look at both the stock markets and oil in the face of the coming election.
In case it has escaped your attention, there is a Presidential election in America in three weeks or so. You might expect that, given the contentiousness of that coming election and all the talk of the President refusing to honor the peaceful handover of power should he lose, that markets would be nervous, and showing it.
This, however, is the chart for S&P 500 futures, E/S since the Covid-inspired lows in March…
Any wobbles there have been on the upward path have been as a result of one of two things. Either they have been a reaction to setbacks in the progress of vaccines and therapies for Covid-19, or they have been in response to a reduced chance of federal aid for the economy. The political situation has been as good as irrelevant.
That is surprising given what is happening in the race.
As the election draws closer, the polls are showing a Biden lead that is growing. Fivethirtyeight’s poll of polls now gives the Democratic challenger a 10.6 point lead over Donald Trump. Yes, I know that the polls were “wrong” in 2016 according to a lot of people, but they really weren’t. The Clinton lead then was just a few points…basically a statistical tie give the margin of error. There was never a lead this big, nor as consistent a lead in swing states. Even a double-digit lead doesn’t guarantee that a particular candidate will win of course, but it does make it far more likely than not. That is why Biden is a clear favorite in the betting markets, and presumably the view of the most likely outcome is the same in other markets too.
As I said, that shouldn’t make any difference to traders, but what makes this so surprising is that it always has in the past.
Research shows that in reality, both the stock market and the economy have done better with Democrats in the White House than with Republicans over the last 50 years or so. Despite that though, the anticipation of a Democratic administration and/or a Democratic victory on election night typically causes a selloff. There are a lot of possible reasons for that. It could be that most wealthy investors and traders have a partisan bias, or it could be an understandable reaction to policy statements and rhetoric from Democratic candidates that claim they will hike taxes on businesses and regulate them almost to death.
Maybe it’s just that traders are coming to realize that selling in anticipation of something that hasn’t happened the last six or seven times it was expected to is just not all that smart. Or maybe it’s that, with millions out of work and a massive drop in GDP right now, the kind of spending usually associated with Democrats wouldn’t be a bad thing. We can deal with the 28 or 30 trillion dollars of debt later, I suppose…
Clearly though, whatever the reason, the stock market isn’t headed lower on the prospect of a Biden win, and nor is the more immediately demand sensitive crude market. That tells me that there are forces much more powerful than politics moving things.
For the stock market, the biggest force is still the Fed.
We tend to think that stocks move only on economic conditions and the performance and prospects of individual companies, but that isn’t the case. There is a supply and demand factor at work in the stock market too. A big increase in investable funds will increase demand for stocks which, even allowing for IPOs and the like, are inherently limited in number.
The Fed is effectively creating hundreds of billions of dollars every month and handing that money to banks and other financial institutions. Their mechanism for doing that, buying bonds, also depresses interest rates, making stocks even more attractive on a relative basis for all that cash chasing a return.
As long as that goes on, it doesn’t matter who is in the White House, stocks are going up.
Crude is a different matter. The Fed can keep on handing out cash, but unless there is a recovery in global demand, a meaningful rise, say to above $50 is unlikely. The good news here, though, is that it seems the Chinese economy is recovering faster than predicted. That in itself creates demand, but it also suggests that if the U.S. and others can get some control over the virus, they can do the same. That control could come with a viable, available vaccine, or it could be just better observance of sensible measure to stop the spread.
Either way, with supply still constrained, any signs of a significant increase in oil demand will push prices higher.
So, while conventional wisdom says that both stocks and crude should be under pressure as Biden gains ground in the polls, that is not what we are seeing. There are other things more important to markets than the election right now, and they continue to add upward pressure to both markets whatever the polls say.