Larry Berman on the unlikelihood of pre-election stimulus
I’m a movie lover. I’ve seen the Ruth Bader Ginsburg story, On the Basis of Sex, several times—it’s one of my favourites. I’m a huge believer in equal rights and personal liberty she championed. Sadly, these same rights she and others fought for will become a huge issue for markets.
The immediate White House response and that of Senate Leader Mitch McConnell suggests the GOP will try to appoint a more socially conservative justice to replace the very liberal “RBG.” Appointing a young social conservative could tilt the bench for decades. Amy Coney Barrett is the leading contender along with Barbara Lagoa. Many will remember how the Republicans shut down former U.S. president Barack Obama’s Supreme Court of the United States (SCOTUS) nomination prior to the 2016 election. Any hopes for a pre-election bipartisan bill to support the economy could be dead-on-arrival with this new battle. This is just the latest blow. The markets will need to deal with this added uncertainty in the coming weeks heading into what could prove to be the most contentious U.S. election in history.
The election will almost certainly involve the SCOTUS like we saw in the 2000 presidential election. There is already constitutional litigation happening at the state level to make it more difficult for people to mail-in vote in key states like Pennsylvania. In its determination between eventual-president George W. Bush and former vice-president Al Gore, the top U.S. court found that that the use of different standards of counting in different counties violated the Equal Protection Clause, ruling that no definitive alternative method could be established within the time limit (roughly a month after the election). Media organizations subsequently analyzed the ballots and found that the originally proposed county-based recounts would have resulted in a different outcome (Bush victory) than a full statewide recount (Gore victory). Florida subsequently changed to new voting machines to avoid punch cards which had allowed dimpled cards or "hanging chads."
U.S. President Donald Trump has made mail-in voting a SCOTUS-level issue with his inflammatory rhetoric in recent months and has taken to Twitter to fan those flames. Many believe we will see a Trump lead on election night, as far more Democratic supporters will vote by mail than vote in person according to recent polling. Some speculate it could take a week (or more) before all the mail in votes are scrutinized and counted (and that’s without litigation.) Can you imagine the uncertainty that week? In 2000, the Bush v. Gore controversy occurred at the same time the tech bubble was breaking (sound familiar?). Perhaps it’s worth an additional 2-3-per-cent uncertainty factor. Perhaps a bit more given the different policy paths regarding taxes between Trump and Democratic nominee Joe Biden.
The S&P 500 started the year at 3,231. It will likely be some degree less than that on election day and if this scenario starts to play out, the 200-day average flattish around 3,100 is at risk. Two dips below 3,000 was a good support level in June with two dips to 2,800 also good support in May. For those of you with cash looking to buy, 2,890 is probably a good bet before the year is out (taking back about 50 per cent of the COVID rally.) If the second COVID wave is a bad one, as it looks like it could be, 2,725 is the 61.8-per-cent retracement point, and would be a likely target. That will put financial conditions under some stress and the U.S. Federal Reserve would likely amp up the printing press once the froth comes off the markets and we are past Nov 3. Doubtful they will act before on the moral hazard of political risk. After the election results, unless Congress totally drops the ball on additional stimulus, I doubt we see it go much lower. But, the Democrats taking both the U.S. House of Representatives and the White House might be the exception that puts even more pressure on stocks.
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