by Jean Josse
Before I begin explaining why I believe this to be the most probable outcome a few disclosures are necessary. First and foremost, at Glass Bead Capital we use a systematic risk management strategy which is designed to protect capital in the event that our opinion about the market proves to be false. We never argue with what the market is telling us, and the market speaks in very simple terms by either moving up or down in price. Markets are never wrong but opinions often are wrong.
First and foremost, it is my belief that if the stock market makes new all-time highs before the election this would almost guarantee a Trump victory. The market is a discounting mechanism and if the likelihood of Trump winning rises into the election so will the stock market. At this point the market is now 10% off its highs. This makes sense as Biden has been leading the polls for the time being. If Biden begins to take an even larger lead into the election the market will follow suit and discount a Biden win with an even deeper pullback.
In any event regardless of who wins once the election is over and a winner is declared the market will have discounted either outcome. Surprises are rare in elections although Trump 2016 was one such event. The one wild card of course is that no winner is declared because the election is either too close to call (think Bush/Gore 2004) or even worse the results are contested. If the latter occurs the markets will become very volatile as uncertainty will continue.
So, we have several possible outcomes a Trump win, a Biden win, and no winner. A Trump win and or lead in the polls and the market will surge immediately and likely make new highs before the election. A Biden win and the markets likely will need to discount more from minus 10% where we are now to minus 15-20%. No winner declared and the market volatility will increase substantially because of extreme uncertainty and will discount further.
I have laid out possible outcomes in all three scenarios. The ultimate outcome is that in all three cases the market will recover and make new all-time highs. Even a Biden win or no winner and I do believe that by the end of 2020 the market will make new all-time highs. A Biden win will just mean a longer correction and a Trump win means correction will be over a lot sooner. No winner will create uncertainty but at some point, we will have a winner and once that winner is established the market likely surges much higher.
There are driving forces which are much more powerful then who will be POTUS for the next 4 years. The first and most important driving force is M2 or the supply of money which is turned on and off like a faucet by the Federal Reserve. We are in a period of easy money supply and until the Federal Reserve turns off the liquidity spigot via tightening of the money supply we remain bullish and want to take advantage of any deviations from the mean caused by temporary setbacks such elections or viruses. The second and just as important driving force is that we are in the midst of a technological revolution which is accelerating exponentially via AI, Robotics, Deep Learning, Electrification of auto industry, Driverless vehicles, Data and the Cloud, Software autonomation services.
In summary the market will most likely discount the result of the election before we know the winner. If history is a guide the incumbent in most cases wins therefore the market will begin to price in a Trump victory before the election. If this outcome proves wrong and Biden is the most likely winner then expect a deeper correction in the market. Either way the market is going higher its just a matter of time as the driving forces of the Federal Reserve coupled with Technological innovation and increased productivity and efficiency are secular forces which in my opinion will drive the market to new highs.
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