The Capital Spectator

Major Asset Classes | September 2020 | Performance Review

Thu, 01 Oct 2020 10:35:01 GMT

September was a rough month for the major asset classes: Every slice of global markets fell. The only exception: cash. Otherwise, the primary market betas lost ground across the board, marking the first full sweep of declines since March.

The S&P US T-Bill 0-3 Month Index, a cash proxy, offered a thin antidote to the selling by ticking up one basis point last month. For the rest of the field varying shades of red prevailed.

The deepest cut: US stocks via the Russell 3000 Index, which retreated 3.6% in September – the first monthly drop for this broad-based benchmark since March’s 13.8% collapse.

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Broadly defined commodities, along with US real estate investment trusts and foreign high-yield bonds were the runners-up for losses in September, shedding between 3.0% and 3.4%.

The Global Market Index (GMI) didn’t escape last month’s broad retreat. This unmanaged benchmark (maintained by CapitalSpectator.com), which holds all the major asset classes (except cash) in market-value weights, lost 2.4% in September, the first decline since March’s unusually steep 10.1% crash.

For the trailing one-year window, GMI is still posting a solid 9.0% gain. That’s a middling result compared with the 15.0% one-year total return for US stocks (Russell 3000) and the US investment-grade bond market’s 7.0% gain, based on the Bloomberg US Aggregate Bond Index.

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Macro Briefing: 1 October 2020

Thu, 01 Oct 2020 09:02:04 GMT

Trump signs bill to avoid gov’t shutdown through early December: NYT
Treasury Sec: Dems and GOP agree on more stimulus: NW
Federal spending to exceed $6 trillion for first time: NG
Wisconsin sets record for Covid-19 deaths: CT
Moderna’s coronavirus vaccine will not be available ahead of election: DM
American Airlines and United Airlines will start laying off thousands: BBG
ECB accelerates corporate-bond purchases to support economy: WSJ
Eurozone manufacturing activity rose in Sep–strongest pace in 2 years: IHSM
UK manufacturing rebound continued in September: IHSM
US private payrolls increased at strongest pace in 3 months in Sep: MW

The ETF Portfolio Strategist: 30 September 2020

Wed, 30 Sep 2020 22:17:13 GMT

Stimulus or no stimulus? That is the question (and has been for months), but the false dawns have run out of road in Washington. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin gave it one more try today (Sep. 30) but no dice. Maybe they’ll pull a rabbit out of the hat but at this stage that’s considered a near-zero probability ahead of the election.

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Who Won The Debate? No One, But America Surely Lost

Wed, 30 Sep 2020 12:25:01 GMT

Whatever you thought of last night’s chaotic “debate” between President Trump and Joe Biden, the event offered no reason to think that the Nov. 3 election will be an orderly affair that cleanly selects a president and lays the groundwork for a new administration to take charge of the nation. Sadly, that low bar of precedent that has prevailed for most of the country’s history on this front appears headed for something decidedly abnormal.

One presidential debate is hardly a forecast of what’s to come–or is it? In this season of extreme political and economic discontent, you can learn a lot by watching the two men vying for the presidency. Unfortunately, the implications are grim.

“This will go down as the worst debate of all time,” tweets Politico journalist Anna Palmer – a sentiment widely shared by nearly everyone who watched this calamity.

The Hill’s Niall Stanage sums up the night accurately, lamenting: “Overall, it was an encounter, just five weeks from Election Day, that seemed incongruously small and unbefitting for a nation facing a once-in-a-century pandemic, widespread economic struggles and tensions over racial injustice.”

The encounter between the two men was so disordered that it prompted speculation that the remaining scheduled debates – two with Trump and Biden and another between Vice President Mike Pence Kamala Harris – will be, or at least should be cancelled. “A tidal wave from the mainstream media is speculating whether the two remaining debates between President Trump and Joe Biden should even be held after their brutal first showdown Tuesday night in Cleveland,” according to Fox News.

As a commentator at FiveThirtyEight.com opines, “The standard debate format has outlived its usefulness, at least for a while.”

Regardless of how last night’s circus influences the institution of formal political discussion, it’s clear that America’s soft power took another blow. Even if you’ve been minimizing (or dismissing) the warning signs in recent years, last night offered little reason to think that US influence and prestige, at home or abroad, was strengthened. Rather, the world’s leading democracy is stumbling… hard.

“Politics needs a reference point outside of politics,” says Professor of Philosophy at the Hebrew University Moshe Halbertal. “It needs values, it needs facts and it needs leaders who respect that there is a sacred domain of decisions that will never be used to promote political gain, only the common good.”

All this would be a temporary glitch if “normal” political and economic conditions were in play. But as recent history reminds, the usual routine has become ancient history.

The US isn’t alone in navigating treacherous political waters and increasingly challenging economic conditions, but nowhere is the chaos more extreme in the developed world.

Perhaps the biggest tragedy is that for all the light and heat of last night’s rhetorical slugfest, there are real issues to discuss, dissect and – yes – debate and allowing them to fester allows various risks to rise, potentially with devastating consequences. Unfortunately, there was almost nothing of practical value dispensed on Tuesday night. Television is hardly the ideal medium for investigating the finer points of policy — much less defining the qualities that determine a nation’s destiny. But even by the low standard of TV’s legacy, last night’s discussion was a disaster.

The good news, if it can be called that, is that most viewers probably already had a clear idea of the candidates’ broad positions ahead of the event. But if anyone learned anything of substance in the 90 minutes of chaos, it was in despite of tuning in.

For anyone who’s been paying attention, the decline and fall of the body politic in America has been painfully on display for much of the past four years. The only question: At what price?

The answer will unfold in the years ahead, on multiple fronts and in myriad ways. There may be no tipping-point moment, although the upcoming election could be close.

Debates don’t determine the technical clockwork of how elections function, at least that was true in the past. But as a reflection of intent and tenor, the Trump-Biden show is revealing in the extreme by warning that Nov. 3 threatens to be unprecedented for all the wrong reasons.

“It was a grim reminder,” This Week’s Matthew Walther grieved, “that there is nothing amusing about the slow but almost certainly inexorable decline of the United States into a senile gerontocracy whose basic organizing principles are numbers going up on a computer screen somewhere and mindless entertainment.”

If that is an overly pessimistic interpretation of Tuesday’s debacle, the burden is still on the optimists to explain the case for anticipating an encouraging path ahead.

“It’s a republic, if you can keep it,” Benjamin Franklin reportedly said after the Constitutional Convention in 1787. Last night suggests the grip is slipping.

The future will be determined by many events to come, only some of which can be managed through political means. But if there a promising road ahead the opportunity for productively resetting America’s trajectory through Washington’s levers, that opportunity is receding at an accelerating rate as the nation battles against what might be called the second law of political thermodynamics.

Macro Briefing: 29 September 2020

Wed, 30 Sep 2020 10:26:54 GMT

The first Trump-Biden debate was decidedly unpresidential: Reuters
Covid-19 stimulus talks face deadline today at noon, Democrats advise: MW
Armenia-Azerbaijan war at risk of becoming wider regional conflict: BBG
China reportedly set to launch antitrust investigation into Google: Reuters
ECB may follow Fed and allow inflation to temporarily rise above target: BBG
Disney will lay off 28,000 park employees due to coronavirus: Reuters
China’s manufacturing rebound continues in Sep, survey data shows: IHS Markit
US home-price growth accelerated in July, rising 4.8% year over year: CNBC
Will Fed’s low-interest-rate policy create challenges when economy recovers? WSJ
Restaurant industry warily eyes fall with reopening hanging in balance: AP
US Consumer Confidence Index rebounds sharply in September: MW

allows inflation to temporarily rise above the institution’s target.

Will Housing Save The US Economy?

Tue, 29 Sep 2020 11:18:38 GMT

It’s a tall order but housing’s enjoying a V recovery and history suggests that this key slice of the economy plays a critical role in the business cycle. Is this a macro silver bullet for 2020 and beyond?

Housing’s role as a leading and arguably dominant force in the business cycle, for good or ill, has been documented in numerous studies over the years, including a 2007 paper that summarized its findings with the informative title: “Housing IS the Business Cycle.”

The reasoning: new construction and sales of homes unleashes a wide range of economic activity, such as purchases of home furnishings and building materials–purchases that have far-reaching secondary and teritiary effects. Of course, the housing effect is a two-way street and so when the sector slides it has an outsized negative effect on the economy.

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Housing was certainly a potent factor in the Great Recession of 2008-2009. In 2020, housing is considered a positive force that could lead the economy out of the coronavirus recession.

Tim Duy, an economist at the University of Oregon, reminds that the sharp rebound in housing demand is encouraging. “What stands out in this recovery is the V-shaped recovery in key cyclical sectors of the economy such as housing:”

Sales of existing homes, a much larger marketplace, have also rebounded sharply in recent months. Sales in this corner jumped to a 14-year high in August.

“[New] home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market,” says Lawrence Yun, chief economist at the Natinoal Association of Realtors, which publishes the data. “Further gains in sales are likely for the remainder of the year, with mortgage rates hovering around 3% and with continued job recovery.”

Construction of residential housing has also bounced, although housing starts and newly issued building permits (a leading indicator for starts) pulled back in August. The lower levels mark the first time since April that the building activity eased.

It’s unclear if the August stumble in starts and permits is an early warning sign or noise. But with new jobless claims still rising dramatically each week, it’s too soon to conclude that housing’s recovery to date will continue. If the ranks of the newly unemployed continue to surge, the headwinds that flow from this trend will eventually spill over into housing.

On the other hand, home builders are bullish in the extreme. This month’s NAHB/Wells Fargo Housing Market Index (HMI), which tracks sentiment in the industry, reached a record high. “The suburban shift for home building is keeping builders busy, supported on the demand side by low interest rates,” observes NAHB Chief Economist Robert Dietz. “In another sign of this growing trend, builders in other parts of the country have reported receiving calls from customers in high-density markets asking about relocating.”

Economist Scott Grannis connects the dots and asserts that the surge in homebuilder sentiment will keep the housing sector humming. The sharp increase in confidence “foreshadows a significant pickup in housing starts,” he writes, highlighting the implied connection between HMI as a leading indicator for construction activity.

The key variable, of course, is the economy’s ability to mint new jobs. Consumers ultimately dictate the housing trend and so employment is especially critical these days since payrolls need to expand at a strong rate to overcome the huge numbers of newly unemployed workers. The margin for disappointment, in short, is thin at the moment.

Payrolls have, in fact, been rebounding sharply after the coronavirus crash wiped out more than 21 million private-sector jobs in March and April. The directional bounce is encouraging but the employment gains to date have recovered only about half of the previous loss.

The critical question: Will the labor market continue to rebound and at a pace that’s strong enough to offset the layoffs and deliver a meaningful growth boost for housing and the broader economy? Cautious optimism prevails ahead of this week’s September numbers for payrolls.

Tomorrow’s ADP Employment Report is expected to post a pickup in growth for this month, although Friday’s official payrolls release from the Labor Dept. is on track to post a softer gain, based on Briefing.com’s consensus point forecasts.

The one thing that all economists can agree on at the moment: the business cycle is unusually vulnerable to weaker-than-expected jobs data. Indeed, if the revival in payrolls stumbles, housing will have a hard time breaking free from that gravitational pull.

How is recession risk evolving? Monitor the outlook with a subscription to:
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Macro Briefing: 29 September 2020

Tue, 29 Sep 2020 09:42:26 GMT

Global coronavirus death toll passes 1 million: CNBC
Conflict on Russia’s southern border at risk of escalating into all-out war: NPR
Tuesday marks a critical juncture for prospects for a pre-election stimulus bill: BBG
EU won’t accept UK backtracking on Brexit deal, EU minister writes: Reuters
Eurozone consumer confidence continues to rebound in September: BBG
Dallas Fed Mfg Index posts stronger growth in September: DF
Biden holds sizable lead over Trump in polls ahead of tonight’s first debate: RCP

Nowhere To Hide: All The Major Asset Classes Fell Last Week

Mon, 28 Sep 2020 11:10:54 GMT

Financial gravity spared no corner of global markets last week. Selling pinched all the major asset classes for the trading week through Friday, Sep. 25, based on a set of ETF proxies.

The setbacks ranged from a trivial dip of 5 basis points for inflation-indexed Treasuries (TIPS) to a steep 3.6% slide for foreign property shares (VNQI).

It’s unusual to see across-the-board losses in the major asset classes, although the latest decline for US bonds is effectively no change, at least relative to the rest of the field.

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Consider the US investment-grade benchmark via Vanguard Total US Bond Market (BND), which posted a slight 0.1% slide last week. As a stabilizing force in a diversified portfolio, BND has been useful this month. Although there are concerns that the historical role of bonds will be challenged in an ultra-low-interest-rate environment, BND has offered a degree of its usual routine by offsetting the losses in risk assets last week. For investors expecting sizable gains, however, the latest results are disappointing. Perhaps this is as good as it gets in the new world order.

Or is it? The question is whether the traditional role of bonds in a portfolio setting will endure with rates at unusually low levels? Unclear, although the recent slippage in BND, albeit on the margins, inspires a reassessment of expectations after decades of rate declines that leave US Treasury yields near zero.

Amid last week’s widespread market declines, it’s no surprise that The Global Markets Index (GMI.F) lost ground. This unmanaged benchmark, which holds all the major asset classes (except cash) in market-value weights via ETFs, shed 1.4%.

Although selling took a far-ranging bite out of prices last week, the one-year trend (252 trading days) still reflects a wide mix of profit and loss for the major asset classes. Leading the way at the moment: US equities via Vanguard Total US Stock Market (VTI), which is up 12.2% on a total return basis for the trailing one-year period.

US and foreign property shares (VNQ and VNQI, respectively) are neck and neck for the steepest one-year retreat: each ETF is down roughly 13% vs. the year-earlier level after factoring in distributions.

GMI.F continues to post a solid total return for the one-year window: 7.7%.

Current drawdowns for the ETF proxies tracking the major asset classes range from a slight 0.5% peak-to-trough decline for inflation-indexed Treasuries (TIPS) to a hefty 45.5% tumble for broadly defined commodities (GCC).

GMI.F’s current drawdown is a 5.5% decline from its previous high.

How is recession risk evolving? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

Macro Briefing: 28 September 2020

Mon, 28 Sep 2020 09:52:52 GMT

Amy Coney Barrett will change balance of power in Supreme Court: FiveThirtyEight
Central banks face new challenges after spending $9 trillion in stimulus: BBG
Trump reportedly paid just $750 in taxes in 2016 and 2017: MW
UK-EU trade talks enter a final phase: CNBC
Armenia and Azerbaijan, former Soviet republics, clash over disputed region: CNN
Judge blocks Trump administration’s TikTok ban: CNBC
Uber wins court fight in London to continue operating: CNBC
Ransomeware attacks heighten risks for clarity on election night: NYT
Growth slowed sharply for US durable goods orders in August: MW

Book Bits: 26 September 2020

Sat, 26 Sep 2020 11:35:09 GMT

● The Wake-Up Call: Why the Pandemic Has Exposed the Weakness of the West,
and How to Fix It
John Micklethwait and Adrian Wooldridge
Review via The Independent
“There are decades where nothing happens, and there are weeks where decades happen”. The situation must be serious when two of the West’s most prominent economic liberals begin a book by quoting Lenin.
Bloomberg’s John Micklethwait and The Economist’s Adrian Wooldridge do exactly that in their book-cum-pamphlet on how to relaunch Western liberal democracy after the pandemic.
‘Wake Up Call: Why the pandemic has exposed the weakness of the West – and how to fix it’ is one of two newly released books that prescribes how government should change for the benefit of us all.

● The Vanishing American Dream: A Frank Look at the Economic Realities Facing Middle- and Lower-Income Americans
Edited by Gene Ludwig
Review via Kirkus Reviews
According to Ludwig, the editor of this volume and the organizer of the discussions at Yale Law School it documents, the lower and middle classes in the United States are desperately falling behind. They are the victims of an “economic tsunami” ravaging them for some time, the effects thrown into grimly sharp relief by the recent pandemic, of which they are “bearing the brunt of the burden.” The crisis is sometimes obscured by an overemphasis on standard economic indices, like the gross domestic product, which fails to capture the heart of the problem.

● White House, Inc.: How Donald Trump Turned the Presidency into a Business
Dan Alexander
Review via The New York Times
“Donald’s Trump real plan,” Alexander writes, was “to turn the presidency into a business.” For some free-market conservatives who keep touting the efficiencies of the private sector, that may have sounded like a dream come true, but what if the business turns out to be a bad one — recklessly managed, drained of cash, gutted of expertise?
The pandemic has provided an obvious test case, presenting the president with a virus that not only has killed 200,000 Americans so far but also continues to decimate his considerable stakes in the hospitality industry. Taking the pandemic seriously should have been a no-brainer for him, buoying his political capital and rescuing his net worth — yet he has refused to do it, pushing states to reopen early and holding an indoor rally just last week. As much as Trump says he loves money, “White House, Inc.” shows that he seems to have a hard time holding on to it.

●Divided We Fall: America’s Secession Threat and How to Restore Our Nation
David French
Review via Vox
French fears not just governmental dysfunction and paralysis, but full-on secession and even civil war. He constructs two in-depth scenarios — one quite violent — by which America fractures into separate red and blue nations following secession, and argues the only viable solution is a supercharged form of federalism in which both sides accept that in a nation this polarized, America can only hang together if it permits different regions to govern apart. But is that an answer to our problems, or simply a form of submission to them?

● Battlegrounds: The Fight to Defend the Free World
H. R. McMaster
Summary via publisher (HarperCollins)
Across multiple administrations since the end of the Cold War, American foreign policy has been misconceived, inconsistent, and poorly implemented. As a result, America and the free world have fallen behind rivals in power and influence. Meanwhile threats to security, freedom, and prosperity, such as nuclear proliferation and jihadist terrorism have grown. In Battlegrounds, H.R. McMaster describes efforts to reassess and fundamentally shift policies while he was National Security Advisor. And he provides a clear pathway forward to improve strategic competence and prevail in complex competitions against our adversaries.

● The Cost of Free Shipping: Amazon in the Global Economy
Ellen Reese
Summary via publisher (Pluto Books)
With cutting-edge analyses, this book looks at the many dark facets of the corporation, including automation, surveillance, tech work, workers’ struggles, algorithmic challenges, the disruption of local democracy and much more. The Cost of Free Shipping shows how Amazon represents a fundamental shift in global capitalism that we should name, interrogate and be primed to resist.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

The ETF Portfolio Strategist: 25 September 2020

Fri, 25 Sep 2020 22:59:43 GMT

Waiting, Watching, Wondering: Maybe it’s the nation’s rising anxiety over the November election. Or worries that the economic rebound is slipping. Whatever the reason, the week that just in ended dispatched losses far and wide.

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Is The Post-Crash Reflation Trade Fading?

Fri, 25 Sep 2020 11:40:12 GMT

Last month the Federal Reserve announced that it was adjusting its monetary policy in a bid to push inflation higher. Based on recent trading in the Treasuries market, the crowd remains unconvinced and may be in the early stages of unwinding a months-long rise in pricing inflation expectations higher.

After crashing in March, the Treasury market’s implied inflation forecast (based on the yield spread for nominal less inflation-indexed maturities) clawed back the loss. But the bounce appears to be reversing.

Consider that in March, as coronavirus panic shook markets, the 10-year’s inflation outlook fell sharply, dropping to 0.5% on Mar. 19, based on daily data published by Treasury.gov. That marked a dramatic change from the start of the year, when the forecast was 1.8%, just below the Fed’s 2% inflation target.

But since that epic collapse, the forecast has been steadily rebounding and at the end of August the outlook had come full circle, returning to 1.80% for the 10-year spread. September trading, however, suggests that the long-running disinflation trend may be returning.

The motivation for the Fed’s policy change, after all, is partly (if not primarily) an effort to address the low-flation bias that’s taken root in the economy in recent years. Reviewing the historical core rate of consumer price inflation reminds that a downside bias has been in force for several decades.

Although the slide stabilized over the past decade around the Fed’s 2% target, the question is whether the coronavirus crisis has shattered the stability and unleashed a new wave of disinflationary pressure?

How is recession risk evolving? Monitor the outlook with a subscription to:
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It’s too soon to know, but the Treasury market’s latest downside revision in inflation expectations suggests that it’s premature to dismiss this possibility. One view of the recent reversal in the inflation forecasts is that the market is expressing new doubts that the Fed’s revised monetary policy will be successful in lifting inflation expectations.

In the near term, the economy will drive the outlook for inflation. The good news is that economists are still projecting that the broad macro trend will rebound in the upcoming third-quarter GDP report (due Oct 29). The Atlanta Fed’s GDPNow model is among the most bullish nowcasts—Q3 growth by this measure is on track to rise 32% (as of the Sep. 17 estimate) after falling 31.7% in Q2 (using seasonally adjusted annual rates of change).

But the aftershocks of the pandemic continue to persist on several fronts. Notably, yesterday’s update on jobless claims shows that the labor market continues to suffer from an usually high pace of new layoffs, week after week. New filings for unemployment benefits rose 870,000 last week. The ongoing surge in claims represents a substantial risk for the economy and threatens to fuel the disinflation trend.

The Treasury market is hardly perfect as a tool for inflation forecasting and so it’s always advisable to take the implied estimates with a grain of salt in the short run. Nonetheless, these numbers offer a real-time estimate that reflects a relatively deep pool of market participants.

The bottom line: the Treasury market’s inflation outlook suffers short-term noise, but eventually the implied forecast aligns with the CPI trend, as shown below. Based on this relationship, the risk appears to be rising that disinflation momentum will pick up in the months ahead. In turn, the potential for even lower (or perhaps negative) interest rates will receive a fresh hearing as markets reassess the macro outlook in the final months of 2020 and reprice assets accordingly.

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Macro Briefing: 25 September 2020

Fri, 25 Sep 2020 10:04:27 GMT

US officials try to assure public that vaccine will be safe: CNBC
NY state will review coronavirus any vaccines approved by Feds: Reuters
European Union to appeal ruling in favor of Apple in $15 billion tax battle: CNBC
GOP and Dems still trying to reach agreement on new stimulus bill: BBG
House Democrats preparing new, smaller coronavirus relief package: CNBC
Is US policy repeating mistakes in 2009’s economic stimulus? NYT
Investors warily eye prospects for US election: MW
Sales of newly built US homes rose to 14-year high in August: MW
US jobless claims continue to surge–up 870,000 last week: CNBC

An Election Like No Other?

Thu, 24 Sep 2020 12:13:38 GMT

US presidential elections always come with a certain amount of risk since the potential for the transfer of power from one party to another introduces a degree of uncertainty on a range of economic and geopolitical issues. But this year’s Nov. 3 contest promises (threatens) to be unusual for all the wrong reasons.

The bedrock of US political stability, and all the economic advantages that flow from that durability, appear threatened in the upcoming election. The Capital Spectator’s baseline assumption is that the institutional framework that guides and controls election outcomes, which confers legitimacy on results, will likely prevail. But for the first time in living memory, perhaps the first time ever in US history, the possibility is rising that an election train wreck is brewing. If so, there are wide-ranging implications for a range of macro and geopolitical subjects.

At the core of this risk is what appears to be a rising inclination on both sides of the political spectrum to dig in and prepare to not concede, no matter the results. This is a dangerous scenario for many reasons and so thinking through the implications has moved beyond the academic to a potentially real-world scenario.

Let’s start with President Trump, who has long hinted that he might not accept election results that show he lost to Joe Biden, his Democratic opponent. At a White House press conference yesterday, when asked if he would commit to a transfer of power if lost the election, the president responded: “We’re going to have to see what happens.” He complained of a “rigged” election process due to mail-in ballots, claiming (without evidence) that “the ballots are a disaster.”

Trump also said: “(G)et rid of the ballots and you’ll have a very … there won’t be a transfer, frankly. There’ll be a continuation.”

Senator Mitt Romney, a rare Republican critic of the president, tweeted: “Fundamental to democracy is the peaceful transition of power; without that, there is Belarus. Any suggestion that a president might not respect this Constitutional guarantee is both unthinkable and unacceptable.”

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A contested election at any point in time would bring new risk factors into the mix, but the potential for destabilization is unusually high this year. As The Atlantic observes:

“The danger is not merely that the 2020 election will bring discord. Those who fear something worse take turbulence and controversy for granted. The coronavirus pandemic, a reckless incumbent, a deluge of mail-in ballots, a vandalized Postal Service, a resurgent effort to suppress votes, and a trainload of lawsuits are bearing down on the nation’s creaky electoral machinery.”

Last week’s death of Supreme Court Justice Ruth Bader Ginsburg only adds to the complication. Trump revealed on Wednesday that he’s thinking about the possibility of a 4-4 split on the Court (now that there are 8 justices), which could bring a deadlock if the election result is ultimately decided through the judiciary a la the controversial 2000 election.

“I think this will end up in the Supreme Court,” the president predicted. “And I think having a four-four situation is not a good situation, if you get that. I don’t know that you’d get that. I think it should be eight-nothing or nine-nothing. But just in case it would be more political than it should be, I think it’s very important to have a ninth justice.”

Nominating and confirming the ninth justice before the election has become highly controversial and is a new factor that’s fueling political polarization. Nonetheless, Trump and the Republican party are moving ahead with plans to confirm a new Supreme Court nominee. The decision provokes intense pushback from the Democrats, in part because of the double standard: Republicans in 2016 refused to consider President Obama’s Supreme Court nominee, arguing that the process should wait until after the election to allow the public to weigh in via choosing a president.

The result is that the Supreme Court factor is another factor that’s driving up the risks of a contested election. Trump’s comments aren’t helping defuse this risk, but the Democrats also appear inclined to push back if Biden loses.

Last month, Hillary Clinton, who lost the 2016 to Trump, recommended that “Joe Biden should not concede under any circumstances, because I think this is going to drag out, and eventually I do believe he will win if we don’t give an inch, and if we are as focused and relentless as the other side is.”

The risk of deadlock is heightened because there’s a distinct possibility that the election results will be inconclusive on election night. The likelihood that mail-in ballots will be unusually high this year suggests that a large portion of the votes won’t be tabulated until days (weeks?) after Nov. 3–votes that could be decisive. In that case, the potential is high for competing narratives and backroom machinations as the nation awaits a final verdict.

The Atlantic’s Barton Gellman considers one possibility: “Trump’s instinct as a spectator in 2018—to stop the count—looks more like strategy this year. ‘There are results that come in Election Night,’ a legal adviser to Trump’s national campaign, who would not agree to be quoted by name, told me. ‘There’s an expectation in the country that there will be winners and losers called. If the Election Night results get changed because of the ballots counted after Election Day, you have the basic ingredients for a shitstorm.’”

All of this uncertainty is focusing minds on what will happen to markets if a “shitstorm” risk is realized. “Recently, I have been getting a number of questions from people who are scared about what might happen to the financial markets at election time,” writes Brad McMillan, chief investment officer at Commonwealth Financial Network. “The fear is that if we get a disputed election, it could lead to disruption and possibly even violence. If so, we could well see markets take a significant hit.”

At the moment, RealClearPolitics.com’ aggregated general election polls (as of Sep. 23) continue to show Biden with a sizable lead over Trump.

Parsing the outlook through the Electoral College, which decides presidential elections, paints a more nuanced picture. Although Biden has an estimated 222 votes (270 are needed to win), there are 191 so-called toss-up votes hanging in the balance and so there’s more than a trivial chance that Trump could still win.

If there’s an Electoral College tie, the process moves to the House of Representatives, which hasn’t happened since 1824. The Washington lobbying firm Mehlman Castagnetti Rosen & Thomas outlines the various ways that an Electoral College deadlock could unfold. By some accounts, this outcome is higher than usual. If so, if the House choose the next president — a process raises a whole other set of complications, controversy, risk factors and opportunity for political mischief.

To be fair, there is a possibility that the election will unfold seamlessly and the loser will accept the results gracefully. Maybe, but it’s getting easier to imagine that this year will be different.

How is recession risk evolving? Monitor the outlook with a subscription to:
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Macro Briefing: 24 September 2020

Thu, 24 Sep 2020 10:02:32 GMT

J&J vaccine moves to final clinical trials: NYT
New stimulus bill before election looks unlikely: CNN
Republicans move ahead to confirm Supreme Court nominee: WSJ
Fauci tells Congress a US vaccine could be available as early as April: CNBC
California to phase out sales of gasoline-engine cars by 2035: NPR
Trump refuses to commit to peaceful transfer of power in election: BBC
Eurozone growth slows to a crawl in September: IHS Markit
UK growth ‘loses momentum’ in September: IHS Markit
Japan’s economy remains in recession in September: IHS Markit
PMI survey data: US economic rebound continues in September: IHS Markit

The ETF Portfolio Strategist: 23 September 2020

Wed, 23 Sep 2020 22:21:20 GMT

US Stocks Flirting With Fourth Weekly Decline: It’s only Wednesday, Sep. 23, but the downside bias for US equities is building. At today’s close, Vanguard Total US Stock Market (VTI) shed 2.6% for the week so far. Today’s sharp pullback more than reverses two days of moderate gains and so it doesn’t take a raging bear to imagine that VTI is flirting with its first run of four straight weekly declines in more than a year.

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Long-Term Corporates And Junk Lead Bond Market Rebound

Wed, 23 Sep 2020 11:32:26 GMT

Nearly every corner of global markets has rebounded sharply since the coronavirus crash pulled the rug out of asset prices in March. The US bond market is no exception, which has enjoyed a strong rally. Leading the way higher within the fixed-income realm by a wide margin: long-term corporate bonds, based on a set of exchange-traded funds.

Using the Mar. 23 bottom in US stocks (S&P 500) as a general trough date, Vanguard Long-Term Corporate Bond (VCLT) has dominated the bounce in fixed income. The ETF is up 37.5% since Mar. 23 – far ahead of the rest of the field.

Although VCLT is holding on to its post-crash lead, the fund has been stuck in a trading range since mid-August.

In what is effectively a second-place tie for returns since Mar. 23: junk bonds (JNK) and intermediate-term corporates (VCIT), which are up roughly 24% since that date.

Various flavors of Treasuries are the weakest performers since the March bottom, although all slices of US fixed-income are currently posting gains from the coronavirus bottom in stocks.

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The US investment-grade benchmark is up a solid 8.9%, based on the Vanguard Total Bond Market (BND).

The question is whether the bond-market’s bounce has run out of road? Although no one thinks economic and financial conditions have returned to “normal,” the jury’s out on whether a new leg down in interest rates is likely at this point. The benchmark 10-year Treasury yield has been treading water in the 0.62%-0.75% range for much of the past month. Unless rates take another dive lower, the bond market will be hard-pressed to break out of its sideways run of late.

What could trigger a new dive in yields? Renewed fears about a rebound in coronavirus infections and deaths in the fall and winter are on the short list. If investors perceive fresh trouble with Covid-19, the risk-off trade could revive and light another fire for the bond bulls.

Meantime, bond market action remains a bit of a yawn, although profiling all the ETFs listed above through a momentum lens shows that the market recently reached a trending state of nirvana with all corners enjoying a strong upside bias. But in recent days, a short-term measure of bond-market behavior (based on 10- and 100-day moving averages) has pulled back from the highest-possible bullish reading as several funds stumbled. A medium-term measure of momentum (50- and 200-day moving averages), by contrast, still reflects an upside bias for all the funds listed above.

How is recession risk evolving? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

Macro Briefing: 23 September 2020

Wed, 23 Sep 2020 10:02:34 GMT

House passes legislation to avoid government shutdown: CBS
Wisconsin declares state of emergency as Covid-19 cases spread on colleges: ABC
Coronavirus’s rebound is weighing on the global services sector: WSJ
Eurozone growth slows to a crawl in Sep, PMI survey data shows: IHS Markit
UK’s economic recovery hits setback in Sep as output slows: IHS Markit
Japan’s recession continues in September, PMI survey data suggests: IHS Markit
Growth picked up in Richmond Fed Mfg Index for September: RF
US existing home sales rose to 14-year high in August: CNBC