2020 Elections: Markets are cheering, but what exactly? Some answers and what's next

A winner has yet to be declared in the 2020 Presidential Elections, which have turned into a nail-biter. Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the results, the reaction in financial markets, and discuss what is next. High volatility is set to prevail.

Yohay Elam: Joe Biden or Donald Trump? The elections are closer and networks have still not called a winner. However, markets are surging.

Valeria Bednarik: Trump is doing much better than expected, guess that's the reason why markets are in risk-on mode.

Yohay Elam: I see two reasons for markets to rise. First, if Trump wins and has a GOP-controlled Senate, he could force a large stimulus package on them. Secondly, perhaps they see a Biden victory as a question of time. Biden is leading in enough states to reach the magic 270. Michigan, Wisconsin, Arizona, Nevada. Do you buy any of these theories?

Valeria Bednarik: The first theory seems the weaker at this point, as the results are too tight. But Wall Street usually needs little to rally on. On a stimulus package, no matter who wins, the fact is that it will come as soon as all this election turmoil ends.

Yohay Elam: Indeed, buy the dip is the way to go for many months or years, I would point to comments by Mitch McConnell. The Senate Majority leader now seems willing to agree on aid to states, Something Dems wanted and Republicans were previously against.

Valeria Bednarik: Yeah, seems McConnell is trying to detach himself from Trump.

Joseph Trevisani: Yes I think the stimulus will now get done. The Dems are going to lose house seats... somewhere between 5 and 10, it seems.

Yohay Elam: But still retain a majority in the lower chamber.

Joseph Trevisani: Huge surprise...they were expecting to gain seats. Yes, they will keep the House as the Republicans will keep the Senate.

Yohay Elam: Maybe markets are back to cheering a split government? That was the narrative earlier in the year.

Valeria Bednarik: Umm I don't think markets will cheer such a scenario.

Yohay Elam: Or maybe markets are cheering anything, as you alluded to earlier Val.

Joseph Trevisani: Whatever the Presidency result  gridlock is the order of the day. That means..no new taxes, no green new deal,

Yohay Elam: There still is a chance that Democrats win Senate seats in Georgia, flipping the upper chamber. One race is headed for a runoff in January, the second one is in the air.

Joseph Trevisani: Yes but as Perdue won easily in Georgia so too this Republican will likely also.

Yohay Elam: Indeed, highly unlikely.

Joseph Trevisani: The biggest losers this election were the mainline polling outfits... They wildly wrong in the state after state. Frankly, many of their predictions were little more than election propaganda.

Yohay Elam: The race was indeed far closer than polls showed, especially in Wisconsin.

Valeria Bednarik: Polling outfits lost 4-year ago

Joseph Trevisani: Indeed...again Trafalgar was the best...

Yohay Elam: They're better at the national level. This time they missed support among Cuban Americans and some other Hispanics for Trump. I guess it will be forgotten if Biden wins. It seems nobody cares about the margin of error, just who comes on top

Joseph Trevisani: Equities are certainly having a party this morning...

Yohay Elam: If networks announce Biden is the winner, will markets "sell the fact"?

Valeria Bednarik: Probably. But it won't take long until they bounce back

Joseph Trevisani: I doubt it...we love court cases and these elections will be decided in the courts... probably the supreme court. There are many questions of ballot legality, deadlines, etc, that will have to be litigated. Networks not so important now.  It is the state governments that will be announcing official returns.  I would expect court injunctions to prevent some announcements until cases are heard.

Yohay Elam: Markets seem to be pricing out a contested election. But indeed, going to courts is a US national sport...

Joseph Trevisani: Even if both sides claim a victory which seems to be happening... Trump is still President.

Yohay Elam: We'll know today or tomorrow. McConnell is moving toward aid to states, and markets seem to like that as well.

Joseph Trevisani: No, I don't think so.  Under a certain margin, the loser can demand a recount...Wisconsin for example will almost certainly be recounted...

Yohay Elam: Rreconts rarely change elections. A Wisconsin recount a few years ago resulted in a shift of 300 votes. Biden's lead in Michigan is 30,000, more than Trump's win there in 2016. I'm sure Trump will try to undermine the election results, I just do not see support for that. I think markets are moving on.

Joseph Trevisani: I agree. Gridlock in Congress seems assured.

Valeria Bednarik: Yes, and I'm quite puzzled as everyone seems to be ignoring that. Particularly Wall Street.

Joseph Trevisani: Wall Street like gridlock..especially with the threat of Democrat taxes and green new deal likely dead.

Yohay Elam: I think that a minimal victory in the Senate would have been even better for markets, as it would have secured a generous fiscal package without risk of big changes. But McConnell´s words today seem to show GOP willingness to compromise.

Joseph Trevisani: Last night before the election, I was warned many of my friends not to believe the media narrative. I say the same thing today. The election is not over.

Yohay Elam: So it´s gridlock but not regarding stimulus.

Joseph Trevisani: Perhaps, but you have to balance the size of the stimulus with the programs the Democrats would have pushed and likely passed if they had the Senate. Yes, there is no real reason for either side to block a large stimulus package, which is it seems obvious is needed. Treasury yields are lower, so despite equity effusion, the more sober market is a bit worried. The 10-year yield is down 10 points.

Yohay Elam: Indeed, bonds are pointing to fear, equities to greed, and the dollar is looking for a direction.

Joseph Trevisani: Haha  yes.  Rather typical.

Yohay Elam: Big events tend to break correlations, but sometimes it is temporary.

Joseph Trevisani: COVID is likely to creep back into attention now.

Yohay Elam: Covid in the U-S. I'll soon be able to fold my 2020 elections bookmarks folder, but the coronavirus one is set to stay.

Joseph Trevisani: Afraid so.  Though the fatality graph is encouraging, if not entirely so. I do wish the media would call positive tests 'diagnoses' rather than 'cases' since a large portion of those 'cases' is asymptomatic.

Valeria Bednarik: Still, seems the people voted to look at their pockets and not at their health. Clearly, more Americans believe they did better, from the economic side in these 4-years, and despite the pandemic. Guess they believe that they can recover their life status once the pandemic is over.

Yohay Elam: Exit polls show a high correlation between those worried about the virus and voting for Biden, and worried about the economy and voting for Trump. Most voted for Biden, probably with a larger popular vote than Clinton's in 2016, but I don't have the exact exit polls to say if a majority is more worried about the economy or the virus.

Joseph Trevisani: Even given the unreliability of exit polls that seems logical. It agrees with each campaign's focus.

Yohay Elam: What's next for markets? We have the Fed and the NFP, but I think it's too soon to move on from the elections.

Valeria Bednarik: Wide choppy ranges until we have a winner I guess.

Yohay Elam: We Volatility.

Joseph Trevisani: Until the election is determined it will dominate the news.

Valeria Bednarik: Exactly. Although the Fed and the NFP may affect markets once the election's dust settles.

Joseph Trevisani: Yes the fifth horseman of the apocalypse.

Valeria Bednarik: Today's ADP was quite a disappointment. Still, with lockdowns going on elsewhere and the US keeping the economy open, the US will likely preserve its advantage.

Joseph Trevisani: ADP link with NFP seems to have been broken.

Valeria Bednarik: Yes, but still a poor outcome.

Yohay Elam: The employment component of the ISM Services PMI also misses estimates, so leading indicators are pointing somewhat lower. What can we expect from the Fed? Basically, wasting our time?

Valeria Bednarik: Not much this time. Yups.

Yohay Elam: Powell will provide an updated view of the economy.

Joseph Trevisani: For both the manufacturing and services PMI, new orders were very strong... Manufacturing 67.9, a new record I believe on a prediction for 45.9, and in services, 58.8, on a prediction for 49.4. Perhaps they are using the election pollsters... I think the Fed will again warn on COVID...

Yohay Elam: Hopefully the Fed rocks the boat, but an election headline could steal the show.