The market may have found its latest hot dose of speculation to rally around: the prospects that President Trump will win re-election come November.
Despite the president’s botched response to the COVID-19 pandemic and social unrest now sweeping the nation — and seeing his approval numbers with Americans dip as a result — some corners of Wall Street are starting to wonder if stocks are melting up because Trump may surprise his critics yet again. The logic here is that the shockingly better than expected May jobs report points to a sharp, V-shaped economic recovery ahead of the election.
In turn, that along with a low interest rate backdrop boosts Trump’s standing among Americans (which has taken a major hit) and reduces the likelihood of a Joe Biden presidency. Voters in effect would be voting with their wallets.
As was made clear by Goldman Sachs this week, a Biden presidency would probably mean higher corporate taxes (and household) in 2021 and lower profits. And possibly — even if Goldman strategists just implied this — lower stock prices and general wealth creation.
But it appears investors aren’t even factoring in that possibility of Biden winning, provided you are of the belief the stock market predicts outcomes six months into the future.
Since the jobs report on Friday (that Trump quickly crowed about in a rambling presser), the Nasdaq Composite has powered to fresh highs on the back of continued gains in big cap tech names such as Microsoft and Amazon. A record number of S&P 500 companies are now trading above their 50-day moving averages. Meantime, a total of $21 trillion has been added back to global stock markets since the March lows.
In short, investors are taking on more risk in the face of valuations many would deem frothy given the challenging global economic backdrop.
Prudential Financial chief market strategist Quincy Krosby says investors should watch the options market to see if the Trump re-election trade strengthens moving forward.
“This is interesting because moving into this week as the market moved higher, you started to see call buying on the election more than you would normally see. We started to see a lot of call buying. But it was based on the notion that you could have a Democratic clean sweep. So if we start to see a pullback in those put purchases or the options to hedge on the S&P 500, it would suggest that [thesis],” Krosby explained on Yahoo Finance’s The First Trade.
‘Market has decoupled from Trump’
The Trump re-election thesis is far from perfect, naturally. It may simply be a small component of the new bull market, which up until now has been fueled by expectations for a pro-longed period of low rates and bond-buying from the Federal Reserve.
“The tax rate [expectations] is a big part of it [the rally], but I don’t think it’s the biggest part of the rally here. This is more about the fact that I’ve gotten control over what we are looking at,” explained Belpointe Asset Management chief strategist David Nelson on The First Trade.
Others on the Street aren’t sold on the thesis at all.
“The stock market has decoupled from Trump,” wrote RBC Capital Markets U.S. strategy head Lori Calvasina in a note this week to clients.
Calvasina added, “For the past year, expectations as to whether Trump will win again in November (as tracked by the betting markets) have been moving in sync with S&P 500 performance. But that relationship has broken down a bit in early June, with Trump’s chances (according to the betting markets) falling and the S&P 500 surging. Perhaps the stock market no longer views Trump as necessary for continued gains. Perhaps it is taking comfort in the idea that Harris, not Warren, will be the VP nominee for the Democrats.”