The Finance 202: The stock market is betting on a Biden victory

The so-called “Biden basket” of stocks — companies in line for a boost from the Democrat’s focus on infrastructure, clean energy, expanded health-care access and reduced trade tensions with China — rose 11.3 percent over the past 30 days, according to Guggenheim Investments. Over the same period, the “Trump basket” — heavy on companies from the financial, oil and gas and domestic manufacturing industries and those that would benefit most from more tax cuts — has climbed 5.2 percent.

“It’s fairly clear is the market is discounting a Biden victory,” says Guggenheim chief investment officer Scott Minerd, pointing to the divergent performances of the candidates’ stock baskets.

For further proof, he says look to the bond market. Treasury yields have been climbing, reflecting a belief among traders that federal borrowing to fund major new stimulus is on tap if Democrats sweep back to power.

The team at JPMorgan developed its own baskets and reached a similar conclusion. The firm’s Biden basket gained 4.5 percent over a two-month period that ended last week. Its portfolio of Trump-friendly stocks, on the other hand, dropped 16 percent over that interval. Via Reuters:

Consider the past few days of trading. The market has closed higher on two of three of them. Part of the uptick probably owes to a bounce off of lows after a weeks-long slide. But with a Democratic sweep looking more likely, stocks also appear to be rallying on hopes the party will make a multitrillion-dollar emergency relief package its first order of business. The Dow Jones industrial average climbed 1.6 percent on Monday, and the S&P 500 gained 1.2 percent.

But that gain was also just enough to put Democrats on the wrong side of a market signal that has predicted election results with high accuracy.

“Since 1928, the S&P 500’s performance in the three months leading up to the presidential election has correctly signaled who will win 20 out of 23 times, according to data compiled by Strategas Research Partners LLC,” Bloomberg News’s Lu Wang and Claire Ballentine write. “When stocks gain during that span, the sitting party has won 86% of the time.” The S&P 500 now sits a four tenths of a percent higher than it did three months ago.

Minerd, for example, says the market “hasn’t fully priced in a blue wave.” He believes that a Democratic takeover would goose stocks as newly empowered Democrats would work to secure a stimulus on the order of the $3 trillion package House Democrats approved in May. Meanwhile, he says investors would push back until the second half of next year their concerns about the corporate tax increases Biden has proposed.

Not so, JPMorgan analysts wrote in a Monday note. That team said investors would view a Democratic sweep as “short-term neutral but long-term negative, as the expected Biden tax policy outweighs the benefits from a larger than expected stimulus package.” 

The Fed chair will speak as uncertainty rises: “Over the past four years the U.S. Federal Reserve has navigated a global trade war, absorbed verbal blows from a volatile president, and confronted a once-in-a-century pandemic. But any hope the election will bring a new era of calm to U.S. central banking may be wishful …,” Reuters’s Howard Schneider reports.

“In principle the Fed’s virtual gathering on Wednesday and Thursday should be of little consequence, with policymakers repeating their now stock commitment to do what is needed to support a recovery … Beyond those immediate risks, the Fed faces other decisions as it approaches either a second term for Trump or a transition to a Democratic administration under Biden.” 

• Deadlines looming: “Most of the key emergency programs are due to expire on Dec. 31. Their lapse would test whether the financial plumbing can weather the pandemic without a central bank safety net. ”

Traders dump junk bonds before the election: “BlackRock Inc.’s $23 billion iShares iBoxx High Yield Corporate Bond ETF had its worst week of outflows since the coronavirus-induced sell-off in February, losing almost $3.7 billion, according to data compiled by Bloomberg. Meanwhile, the $6.5 billion Xtrackers USD High Yield Corporate Bond ETF posted its largest daily withdrawals on record,” Bloomberg News’s Claire Ballentine reports.

“Investors across asset classes are bracing for a surge in volatility, fueled by a contentious presidential election … Several borrowers in the high-yield market have shelved deals recently, while others have decided to sweeten the terms.”

The mortgage IPO boom is also facing issues: “For much of 2020, healthy demand for mortgages and a surge in public listings — the IPO market is on pace to record its best year since the tech boom of 1999 and 2000 — created ideal conditions for non-bank mortgage lenders to raise capital through public listings. But a volatile autumn in the markets underscores the risks still looming over the mortgage sector,” the Wall Street Journal’s Orla McCaffrey reports.

A protracted election fight would come as the economy continues to struggle: “America’s economy faces severe new strains in the two months between Tuesday’s election and January, a period when Washington could be consumed by political paralysis and gridlock,” Jeff Stein reports.

“This window is typically used by successful presidential candidates to plan for the outset of their administration, but several large economic sectors are bracing to be hit by both an increase in coronavirus cases and the arrival of winter weather. These factors could exacerbate extreme slowdowns in the travel, restaurant and hospitality industries and further depress an oil industry already roiled by low prices.”

• The prospects for a lame-duck stimulus look terrible, too: “All signs suggest that we’re in for the worst of this at the same time the situation in Washington is also becoming its worst and most horrible,” American Enterprise Institute economist Michael Strain told my colleague.

Manufacturing is soaring but may also encounter issues: “Manufacturing activity accelerated more than expected in October, with new orders jumping to their highest level in nearly 17 years amid a shift in spending toward goods like motor vehicles and food,” Reuters’s Lucia Mutikani reports. But with coronavirus infections soaring, the industry could see a slowdown. 

• The latest case count: “The United States reported more than 86,000 new coronavirus cases on Monday, pushing the total count to nearly 9.3 million, according to data tracked by The Post. Twelve states — Arkansas, Iowa, Kentucky, Missouri, Montana, Nebraska, New Mexico, Ohio, Utah, West Virginia, Wisconsin and Wyoming — recorded record numbers of hospitalizations,” Antonia Noori Farzan reports.
• Birx contradicts Trump: “Deborah Birx, a top White House coronavirus adviser, sounded alarms about a new and deadly phase in the health crisis, pleading with top administration officials for ‘much more aggressive action,’ even as Trump continues to assure rallygoers the nation is ‘rounding the turn’ on the pandemic,” Lena H. Sun and Josh Dawsey report.
• Meanwhile, Trump suggests he’ll fire Fauci: “Trump’s suggestion that he might fire Anthony S. Fauci, the nation’s top infectious disease expert, marks another escalation in his months-long feud with the public health expert over the president’s response to the pandemic,” Andrea Salcedo reports. (Firing Fauci would actually be quite difficult.)

• Malls dragged into bankruptcy by retail struggles: “Pennsylvania Real Estate Investment Trust and CBL & Associates Properties Inc. sought protection from creditors … Together the two REITs account for some 87 million square feet of real estate across the U.S., according to court papers,” Bloomberg News’s Jeremy Hill reports.
• Clorox profit more than doubles: “The company’s sales jumped 27 percent, the fastest growth in at least two decades,” the WSJ’s Sharon Terlep and Dave Sebastian report. “Clorox said it expects sales growth due to covid-19 to remain elevated compared with the prior year but to slow down in 2021 … As people stayed home, Clorox also had big sales gains for products from Kingsford charcoal to Hidden Valley dressing and Glad trash bags.”
• Rental car firms are seeing business turn around: “Companies crushed by a collapse in bookings at the onset of the pandemic, are now getting a lift from two unexpected sources: rising used-car prices and more people looking to travel by car,” the WSJ’s Nora Naughton reports. “These trends helped Avis Budget Group Inc. swing to a net profit of $45 million in the third quarter, reversing losses in the first half of the year, the company said …”

Win or lose, the next few months could be hectic: “Biden’s team is preparing for the possibility that Trump, should he lose, would block hundreds of Biden officials from gaining access to government resources as required by law,” Anne Gearan, Yasmeen Abutaleb, Amy Goldstein and Josh Dawsey report.

“Top Biden transition members have discussed potential legal responses and are eyeing other ways, should Biden win the election, to begin what could be one of the most volatile transfers of power in American history, occurring at a moment when the economy is in shambles, coronavirus cases are on the rise and emotions are raw after a divisive election.”

• What’s happening inside the White House: “The White House has placed Chris Liddell, a deputy chief of staff, in charge of the transition, according to several officials. Trump was reluctant to sign the administration’s formal transition papers, aides said, and does not like the idea of participating in a transition, believing it is bad karma. He agreed after being told it was statutorily required, but does not want publicity around the effort, the officials said.”

Biden’s largely unknown economic adviser: “A former chief economist for Biden in the White House, Ben Harris helped fashion a campaign agenda from the work of a small inner circle and hundreds of outside economists and sell it to the donors, executives, labor unions and activists whom Biden needs behind him to win the election. He has two other jobs but works up to 50 hours a week for Biden, unpaid,” the New York Times’s Jim Tankersley reports.

“Harris helped craft include income and investment tax increases on top earners, higher taxes for corporations and a variety of spending increases in areas like clean energy, infrastructure and higher education … The strategy also appears to have helped Mr. Biden with a broader audience.” 

Tired of negative publicity from the relationship, the bank aims to end it after the election. “Deutsche Bank has about $340 million in loans outstanding to the Trump Organization, the president’s umbrella group that is currently overseen by his two sons, according to filings made by Trump to the U.S. Office of Government Ethics in July and a senior source within the bank,” Reuters’s Matt Schuffham, Tom Sims and John O’Donnell report. “The three loans, which are against Trump properties and start coming due in two years, are current on payments and personally guaranteed by the president, according to two bank officials.

“In meetings in recent months, a Deutsche Bank management committee that oversees reputational and other risks for the lender in the Americas region has discussed ways in which it could rid the bank of these last vestiges of the relationship, two of the three bank officials said. The bank has over the years lent Trump more than $2 billion, one of the officials said.”

Despite the pandemic, punitive actions brought in $4.6 billion. “The feat was driven by the results of a few large cases, including $1.2 billion that a mobile-messaging company, Telegram Group Inc., agreed this year to repay investors to resolve a regulatory lawsuit over its sale of a cryptocurrency. Telegram neither admitted nor denied the claims,” WSJ’s Dave Michaels reports. 

“Some long-fought civil investigations were settled during the year. Wells Fargo & Co. paid $500 million to the SEC to end a probe related to the bank’s long-running fake accounts scandal. But a $400 million fine against Goldman Sachs Group Inc., related to the bank’s work for a corrupt Malaysian government fund known as 1MDB, was announced weeks after the close of the government’s fiscal year and will be included in 2021’s figures.”

There’s a very good chance we won’t know the definitive outcome of the election tonight. That’s thanks to slow ballot counting in some battlegrounds. “Tens of millions of early votes have already been cast in the 2020 election, but in several battleground states, mail-in ballots will go virtually untouched until right before Election Day. This delay, which is dictated by state laws, could cause results to trickle in for some of the closest races nationwide,” Kate Rabinowitz writes. 

“The Bipartisan Policy Center recommends states allow processing of ballots to start at least seven days before the Election, on Oct. 27. Five states with competitive races for the presidency allow less time than that, with two — Pennsylvania and Wisconsin — not allowing ballots to be processed before Election Day.”

• The Fed’s FOMC begins its two-day meeting

• Fed chair Jay Powell meets the press after the FOMC meeting
• The Labor Department reports weekly jobless claims

• The Labor Department releases the monthly jobs report