At this time of year, baseball normally would be ending its marathon 162-game regular season and be about to begin postseason play, culminating in the World Series at the end of October. This being 2020, nothing is normal. After a Covid-abbreviated 60-game regular campaign, an expanded roster of 16 teams will vie in the playoffs, with the World Series winding up in Arlington, Texas, home of the Rangers, a team that won’t even be in the playoffs.
The U.S. presidential race also enters its final and most crucial stage this week, with Republican President Donald Trump facing his Democratic challenger, former Vice President Joe Biden, in their first debate on Tuesday evening. That will be the culmination of a seemingly endless process, even longer than a normal baseball campaign, that got under way with the first debate among the Dems’ contenders (and not a few pretenders) back in mid-2019. In comparison, an elephant’s gestation period is 18 to 22 months, and it takes 11 to 14 months for a donkey’s foal to emerge.
The presidential and congressional elections have been rumbling in the financial markets’ background for weeks, but are moving to the forefront now. Friday also will bring the September employment report, the final jobs data to be released before Election Day, Nov. 3. The economic numbers this time might affect the political world even more than the markets, given the importance of voters’ pocketbooks on their election decisions.
Election Day this year is a misnomer, however, because counting the ballots could extend for days and weeks as a result of expanded mail and early voting. The uncertainty from what could be a delayed and contentious tally is expressed in the pricing of options well beyond Nov. 3.
The graph of implied volatility of at-the-money options on the
shows a “kink” in contracts expiring in two-to-three months, says Peter Cecchini, founder of Alpha-Omega Advisors and former global chief market strategist at Cantor Fitzgerald. After that, the curve slopes downward, indicating a perception of receding risk. A year ago, in contrast, the volatility curve sloped gently upward to represent slightly greater risk on options expiring on a more distant date.
“Of course, it’s not just the election,” he writes in an email. “Since then, there’s been a pandemic and recession.” Federal Reserve Chairman Jerome Powell has been especially explicit in calling for additional fiscal policy assists for the economy, which Cecchini suggests reflects a lack of “monetary policy space,” with the central bank already pinning its federal-funds target rate near 0% and buying $120 billion of Treasury and agency mortgage securities each month. Further adding to the options market’s disquiet is Trump’s refusal to pledge a peaceful transfer of power should he lose the election, Cecchini adds.
The chances of a pre-election fiscal package are far from certain, especially with the coming contentious confirmation fight over the Supreme Court vacancy left by Justice Ruth Bader Ginsburg’s death. However, Treasury Secretary Steven Mnuchin said on Thursday that he and Democratic House Speaker Nancy Pelosi are continuing negotiations over a new stimulus bill. Democrats are drafting a $2.4 trillion measure, smaller than the $3 trillion-plus Heroes Act passed by the House in May, but still far larger than what Republicans have been willing to support.
The GOP has resisted another multitrillion-dollar deal since recent economic data portray an apparent sharp, V-shaped recovery. Early estimates of the September jobs numbers to be reported on Friday call for an increase in nonfarm payrolls of 850,000 to 900,000, a robust gain but shy of the previous month’s 1,371,000 jump. (Hiring of temporary census workers boosted August’s payrolls by 240,000, while 40,000 of them were let go in September, according to Capital Economics’ estimates.)
The effects of the federal fiscal relief thus far, notably the $2.3 trillion Cares Act, are waning, with the end of $600 weekly supplemental unemployment benefits in August. With prospects of further income support fading, Wall Street economists are sharply lowering their growth forecasts for the year’s final quarter. Goldman Sachs cut its fourth-quarter real gross domestic product growth number in half, to 3% from 6%. JPMorgan trimmed its estimate to 2.5% from 3.5%.
To be sure, that would follow what could be a huge 30% annualized rate of expansion in the current quarter, which would still fall short of the 31.7% annualized contraction in the second quarter, when much of the U.S. economy was shut down.
While the markets will be watching the world of politics, financial and economic variables might have more impact on the presidential outcome. According to a new model constructed by Strategas’ Washington policy strategy team led by Dan Clifton, the incumbent party candidate’s popular vote results have been accurately predicted by four variables. These are the S&P 500’s performance three months ahead of Election Day; the value of the dollar (weaker being better); the incumbent’s approval rating; and the state of the economy.
Strategas’ model has predicted the popular vote of the incumbent party’s candidate within 0.75 of a percentage point since 1988. (Excluding the 2008 election during the Great Financial Crisis, the margin was 0.18 of a point.) Of course, Al Gore and Hillary Clinton won the popular vote in 2000 and 2016, respectively, but lost in the Electoral College.
This model shows the current race tighter than the polls, which have Biden leading Trump by 6.5 points, down by about a point in the past month, according to the RealClearPolitics Poll Average. But “Trump’s trend has been falling in September, with equities selling off and the dollar rising,” according to a Strategas client note.
That’s just a snapshot of the current conditions, they emphasize. The race’s tightening coincides with fewer new Covid-19 cases, shifting voters’ attention to the economy, the Supreme Court, and law and order, they add. But a renewed flare-up in Covid could move the emphasis back to Trump’s handling of the pandemic.
If 2020 has shown anything, a lot can change in a month.
Read the rest of Up and Down Wall Street:Credit Is Tightening. Why That Matters for the Economic Recovery.
Write to Randall W. Forsyth at [email protected]