Morning Notes — Downside Catalysts

The market will face a couple of potential downside catalysts over the next ~2 months.  The first catalyst is the September 16 FOMC meeting, where participants will look to see if the Fed supports its new policy framework with more stimulus.  The second obvious catalyst could be the US Presidential election with the potential for close results to be contested. Ultimately, I don’t think markets would care if a contested election results in months of political gridlock and inaction, especially if the runup to the election results in investors holding larger than normal cash balances.  This has been a major part of the bullish narrative.  Even today, with the S&P 500 at record highs, overall equity positioning remains lighter than average.  CTA beta, hedge fund beta and individual positioning indicators are all below average levels and equity sentiment has remained net-bearish.  You should be more concerned about a potential correction when these indicators are reversed…like they were in September 2018, just before the Fed changed forward guidance and bond yields spiked.  But given current positioning and sentiment levels, we’d view any Fed-led/election-led pullback as a buying opportunity.