October 28, 2020
Chartist: Yesterday, the S&P 500 broke our near-term support level at ~3400 and currently testing secondary support at ~3295. A number of popular CTA triggers exist at this level and a break below could lead to increased selling pressure. The ~3220 range from early September is still the next area of support, but a ‘preference-for-cash’ environment would have us focused on levels between 2950-3050.
Election: Bond markets seem partially priced for a Democrat-sweep scenario that includes large-scale fiscal relief spending, infrastructure spending and a minimum wage hike. Ten-year bond yields have increased ~30bps since early September as higher fiscal spending would mean greater Treasury issuance. While not fully priced for this outcome, bond yields probably have another ~25bps upside given an assumed increase of ~$3T in fiscal spending next year. This scenario would also mean a wider US current account deficit and lower value for the US dollar. Expectations for massive infrastructure spending would help steepen the yield curve, which would benefit value sectors like Financials, Materials and cyclically-sensitive Industrials. It’s unlikely the entire equity market would welcome a Democrat sweep, while a ‘blue-wave’ scenario (landslide Biden win and Democrats pick up 5 or more Senate seats) would be less-welcome on increased expectations for higher tax rates and increased regulations. Alternatively, a status quo or gridlock scenario could unwind some of the upward pressure on yields and curve steepening, which would likely favor growth sectors like Tech. This scenario is not priced into markets and given sector weightings, could drive the S&P 500 higher over the intermediate term.