We expect investors to increasingly focus on potential election outcomes. In our view, this election cycle is really a referendum on President Trump’s polices and handling of the pandemic. While it’s still early, Democrats have significant momentum based upon recent polls and electronic market odds. Both suggest that a Democratic clean sweep is increasingly likely in November.
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We expect investors to increasingly focus on potential election outcomes in November. In this note, we provide brief overviews of what we believe are the ten election issues that will have the greatest impacts on financial markets. Our commentary is focused on the American public’s perceptions of these issues and the potential impacts these issues will have on the economy and markets.
June’s employment report was another big upside surprise. Looking at the details, pretty much everything in both the establishment and household surveys were strong relative to expectations. At the same time, U.S. COVID-19 infection rates are spiking once again. As illustrated by our 50 State Breadth Index, 44 states are seeing infection rates accelerate on a 7-day rolling basis, while only 6 states are seeing improving trends.
Companies with large underfunded pension plans were among the hardest hit stocks in the Feb-March market sell-off. Despite the recent recovery, many of these companies are cyclical with higher levels of debt, and pensions only exacerbates the equity risk. Sectors most impacted are Disc., Industrials and Materials. Cos. with the highest underfunding to market cap. include (in order) American Air, Alcoa, Olin, Navistar, Xerox, GE, GM, Goodyear, Ford, NCR, Delta, DOW, Macy’s, Cliff’s Nat., Tenet, Ardagh and Corteva.
The Fed has become increasingly aggressive over the past six weeks in its bids to support the economy and asset markets. On May 12th, the Fed’s SPVs started purchasing corporate bond ETFs. On June 10th, Fed Chair Powell effectively stated that he doesn’t care if the FOMC’s polices are inflating asset bubbles. On June 15th, the Fed announced that the SMCCF could start buying individual corporate bonds, including those that have been recently downgraded to junk. All of these actions have occurred while yield curve control expectations have been rising rapidly.
The tug-of-war between central bank liquidity (i.e., the bulls) and weak fundamentals (i.e., the bears) continues. The latest iteration has been rising MMT expectations in order to offset exploding COVID-19 infection rates in several states that have thrown reopening plans into question. Our sense is that near-term risks are weighted to the downside, but shorter-term calls remain precarious in this environment. Longer-term, we remain bearish and believe that stock prices and fundamentals won’t remain disconnected forever.
This compendium contains the complete series of reports in which we discuss and explain accounting practices and/or transactions that mask cash flow. Given significant GAAP and management latitude in policy decisions, reported cash flows cannot simply be taken at face value.
Spikes in COVID-19 cases and hospitalizations have resulted in the governors of three of the four largest states by GDP (CA, TX & FL) reinstituting some restrictions and/or slowing reopening plans. Our sense is that a significant percentage of citizens in these states are likely to reduce activity levels out of fear of contracting the disease as well.
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