Tom Boyle
Tom Boyle

US Election Watch: Market chance of contested election shrinks

Donald Trump’s handling of his own diagnosis with COVID-19 has not been viewed favourably by the US electorate. During the President’s relatively short stay in hospital he handed more than 4 pts to Biden’s lead over him in the polls. The twitter rampage on his return to the White House smacks of a combination of frustration and desperation at his lagging poll numbers. Another U-Turn on a new fiscal package is the latest attempt to pick up some stock market momentum going into the election which is now less than a month away.

With such a short period of time until the election the ability of a split congress to come to an agreement on a new stimulus package seems unlikely, given they have been working on a package for some weeks now to no conclusion. House Democrats are looking for $2.2 trillion, versus $1.2 trillion from the Republican controlled Senate. The White House, on the other hand, is looking for only $700 billion.

Financial markets are rather upbeat at the prospect of further stimulus whether it comes from a Biden or Trump White House. Long dated treasury yields have been rising on the expectation of a mountain of new debt which will be needed to finance everything from stimulus checks to infrastructure spending.

Long term treasury yields relative to short term treasury yield rising indicates that the market is preparing for a wave of new debt:

Source: Bloomberg

 A steeper yield curve also signals the expectation of higher growth and inflation to match. Biden’s plans for trillions in infrastructure spending would likely produce the economic growth that is desperately needed if the US is to continue the expansion it has been going through since Trump took office.

The Atlantic House US Enhanced Return fund is positioned to outperform the US in a range of scenarios, both with and without an immediate fiscal package. Currently the fund’s portfolio should outperform if the US market is down as much as 25% over the next 7 years, and as high as 44% from current levels where, by historical measures, equity prices would become stretched.