The week has started with all eyes on first debate between Donald Trump and Joe Biden. Not only during the debate not even one significant statement has been made, but also this debate caused such a disappointment, that a big percentage of Americans felt sufficiently anxious for the future of their country.
The end of this week and the beginning of the next one are allegedly going to be very frustrating, since on Friday morning the futures in America have recorded losses of more than 1,5%. This is because Donald Trump and First Lady Melania, came out with the news that they have been tested positive for Covid-19 and have already been quarantined in the White House, with the medical group to have taken action. Volatility index VIX, soared over 16%, causing turmoil in the run-up to the election.
It is especially important to see if American President’s health adventure will affect the possibility to claim his re-election in the upcoming elections. Of course nobody can know for sure what will happen in case American President’s health condition deteriorates. For now, Trump is 7,9% behind Biden.
Donald Trump ratings are highly correlated with stocks and the dollar. When both of them rise, so do Donald Trump’s ratings. Until now, S&P 500 has done what is needed and has managed to lead the rise of percentages from 40% to 42,9%. Dollar has given no support, as it is still moving lower. Since short positions in dollar are too extreme, if dollar rallies sharply in the next couple of weeks, it is very likely for Trump to bridge the gap even more.
Although S&P 500 captures the particularities of this year, including the losses especially in the beginning, now the index seems to move accordingly like in any other pre- election period since 1992, with the exception of 2008, when the global stock market crisis burst out. According to this pattern, there is a strongly upward rally in the summer, followed by a fatigue feeling in the months of September-October, with October being more aggressive and after that a rally that continues until January of the next year.
Which would be the macroeconomic background after the elections?
As I have mentioned in previous reports, the current situation, as captured in the stock market, has common points with the period of 2008-2009. Other macroeconomic data seem to confirm that. For instance, many companies do not operate and all those that do operate again, have lost a significant part of their revenues, while those who have debts cannot repay their obligations. The same goes for individuals.
It is really a situation that reminds us of the 2008-2009 period. And this situation seems to be putting pressure on the balance sheets of American banks, the non- performing loans of whom seem to be increasing and so do the bank requirements. In order to avoid capital instability, Fed took the decision, this week, to forbid until the end of 2020 dividend distribution from banks, as well as the activation of programs for repurchase of own shares.
Since pressures are expected to increase further due to the uncertain working future of employees in the tourism, the recreation and the airlines sector, the probability of the provision of a colossal new support immediately after the elections is very high.
The bottom line is that investors need to be prepared for potential new opportunities that a short-term market turmoil could create. In my opinion, a Biden’s victory shall not come as a surprise, since markets already move under this scenario. So I do not anticipate particularly high volatility. Lastly, I appreciate that in case Biden gets himself elected, he will certainly want to take advantage of the sharp upturn of markets and economy, triggered from the first support package. Otherwise, he will be charged a rapid failure and then he will have to approve an even more huge support package, an option that might be hard to manage.