Purple Wave

What colour do you get when you mix blue and red?

As we sit waiting for Nov 3rd to finally (or maybe not) determine the future shape of the U.S. political landscape, I can't help but marvel at the market's ability to engage in short-termism. There are only three permutations of the possible outcome. Blue Wave, Split Pot, or Trump Surprise.

All three are bullish for the market. Why? Because the economy can get on with it and stop obsessing about the sideshow in Washington.

The recent choppy price action has been consistently over-analyzed daily by the pundits and headline writers. A Blue Wave means rotation to cyclical equities, says one. A Split Pot, wherein the Republicans keep hold of the Senate means a market decline that reflects the fiscal gridlock, says another. And what about the outlier scenario - a Trump win that means four more years of policy devolution and chaos. Cue Gold, Bitcoin and load up on the prepper manuals, say the perma-bears.

None of these outcomes will be as important as the continuation of the recovery in global economic growth that is already bake-in due to cyclical forces that politicians can even comprehend. And we mostly have the Fed to thank for that. Fiscal stimulus will be a nice but not necessary ingredient for the stock market over the next few months. The U.S. consumer has finished spending the first one yet. And retail sales running at an 8% clip have put the goods-producing economy in a huge inventory hole. Short of a real acceleration of COVID infection rates, and more importantly morbidity rates, the economic recovery will be a standard-issue and not unlike the 2009-10 experience.

The much hoped-for rotation trade, currently coiling like a cobra ready to strike, is awaiting the removal of two uncertainties - one real and one imagined. The beginning of the end for the COVID pandemic is the first and most important roadblock. That will come sometime next year. The other one - who is in charge? - is far less important by a wide margin. Even Democrats will vote for a stimulus package that Republicans propose, should they cling to power. That would just add fuel to an already cheery glow coming from the rising economy. 'Blue Wave' fears of higher taxes and strict regulations from a Democratic Administration are premature and overstated. They will let the economy breathe first with an emphasis on government spending on infrastructure.

So don't worry be happy, whatever the colour of the wave. Just get ready to start surfing again.

Risk Model: 5/5 - Risk On

The model is saying stay with this market. My comfort level has risen recently as I'm seeing an orderly credit market combined with strength in the industrials metals. The economy is showing signs of resilience that is at odds with the pessimism built around the COVID second wave. Head fakes are shaking out the last of the Nervous Nellies. Be there or be square.