The Free Thought Project, Guest Waking Times
After reading months of ridiculously goalseeked Wall Street commentary, where first a Trump victory was the best outcome for stocks (at a time when Trump was seen as a favorite to win), then a Biden victory becoming the best-case outcome for risk assets (this predictably emerged around the time Biden took a lead in the polls), then a Blue Wave emerging as the most bullish outcome (around the time a Democratic sweep became the most likely outcome according to polls), and then following a brief detour when Wall Street briefly freaked out about Congressional gridlock when a split Congress suddenly became an all too real possibility, we went full circle and a Trump victory once again became the most bullish outcome (according to JPMorgan), traders and analysts would simply roll their eyes and snicker whenever a new “scenario” emerged from Wall Street’s strategy desks.
There was a simple reason for that: as One River’s Eric Peters explained earlier, ever since the arrival of MMT in March, the simple reality is that for stocks it no longer matters who is president, to wit:
When stocks bottomed on March 23rd, Trump narrowly led Biden in betting markets. But pandemics have consequences and this catastrophe hit a nation that had spent decades optimizing its economy to spur asset price appreciation. America’s financial system was as overleveraged as it was unstable. A depression was inevitable in the absence of something utterly unprecedented.
On March 27th Trump signed the $2.2trln CARES Act, and this, combined with a breathtaking array of asset purchase programs marked the effective start of MMT (Modern Monetary Theory) – with the Fed and Treasury coordinating policy.
And ever since, it has mattered less who wins this election. Because you see, once the link is broken between what the government must collect and what it can spend, who leads the nation is less consequential – at least to stock markets in the near-term.
Of course, cynics will say that the presidency – which long ago devolved into a mere symbolic figurehead position – stopped mattering for markets long before March, and the data will certainly back that up. As the following chart from Ed Yardeni shows, no matter who is president or what whether Congress is united or divided, stocks go in just one direction: up. Specifically, during the previously six “Blue Wave” periods, the S&P was up 56% on average; while during three prior “red waves”, the market rose 35% on average. As for the “dreaded” divided government period – which Bloomberg hyperbolically trumpets today in “Fund Manager Nightmare Is Biden Without Blue Wave Congress” – well guess what, during the seven periods of divided government: the S&P up a whopping 60% on average!
Based on this, one can argue that gridlock is the best thing for stocks.
Why? Because the more dysfunctional the presidency, and Congress, the more the Fed has to take matters into its own hands. In fact, it is this very logic that has allowed stocks to soar to all time highs even as the economy barely grew for the past decade and then cratered into the steepest contraction on record.
And for once, we had an honest, objective assessment from none other than JPMorgan, which in its latest Flows and Liquidity note published on Friday cuts to the chase and without any of the now ridiculous “narratives” writes that “The equity bull market should resume post US election.”
Why? For two simple reasons: i) a surge in debt which will boost stocks as it has for the past century, and ii) if it’s bad the Fed will step in.
In fact, the worse it gets the better it will be for stocks, and in a moment of brutal honesty from the largest US commercial bank, JPMorgan’s Nick Panigirtzoglou who is clearly tired of goalseeking why every single political scenario would be bullish for stocks, admits that even another economic catastrophe such as a new round of lockdowns will be great for markets, to wit:
Although it has had a negative impact in the short term, the reemergence of lockdowns and resultant growth weakness could bolster the above equity upside over the medium to longer term via inducing more QE and thus more liquidity creation….