Fiscal Spending Implications
October 21, 2020
Spending: Control of the Senate is the largest near-term macro issue for markets. Expectations for large-scale fiscal spending under a Democrat sweep scenario drove a ~3 week rally in equities. This started on 9/24 when a sell-side equity strategist used a $5T+ spending estimate by simply combining a Biden campaign plan with Pelosi’s ask for ~$2.4T in fiscal relief. While fiscal spending expectations of ~$5T might seem unrealistic, more spending will lead to higher bond yields and a potentially steeper yield curve. This would have positive implications for cyclical/value sectors (Financials, Materials and Industrials) and potentially negative implications for growth sectors like Tech where positioning is overcrowded. Be careful what you wish for or at least be mindful of the implications.
Side note: If we’re assuming large-scale fiscal spending under a Democrat sweep scenario, we should also assume higher effective tax rates and greater regulatory headwinds. The immediate implications of higher assumed tax rates in 2021 could pull some shareholder capital returns (special one-time dividends) into Q4’20.
Contrarian: Extreme bearish equity sentiment and extreme levels positioning indicators were part of our bullish narrative in late-March. Below average equity positioning and elevated bearish sentiment through the summer provided ongoing contrarian support for equities. Last week, we explained that equity sentiment had returned to neutral levels, while hedge fund and CTA beta moved above average levels. While these contrarian indicators are no longer ‘supportive’ that doesn’t mean they’re now flashing signs of an impending market top. Moreover, we see record levels of non-bank cash holdings (M2) providing substantial longer-term support for equities.