Stock markets on a knife edge

Abraham George Macro View

The presidential debate was outright ugly. I watched it in full. The president displayed many below the belt jab moments. One should have expected this sort of behavior from a president who hung out with people like Don King , Mike Tyson and Vince McMahon in his previous career. The general consensus could be that Biden stepped over a low bar of expectations. That should give him some incremental gains for the election.

However, the historical evidence tells a different story. In the past sixty years of debates/ elections , there is no correlation between debate winners and election outcomes. As for the first debates, the winner of the first debate lost five of the past six elections. The Democrats continue to push the narrative that the health crisis is still raging and that the economy is in pure shambles. Trump didn’t do a lot to challenge that, despite the clear data on hand.

The lockdown was all about preventing a run on hospital capacity. From a very bad situation at one point the COVID patients per hospital in the US are down to five for the 50 and above age group. And a large percentage of those are hospitalized with COVID not because of COVID.

Meanwhile the positive surprises continue to roll for the economy, in an environment where the size of the response has been far greater than the size of the economic damage. The Chicago PMI report released yesterday showed a spike to a nearly two year high indicating a big snap back in business activities.

The Socionomics Institute who have analyzed past US presidential election bids have found a positive, significant relationship between the incumbent’s vote margin and the prior net percentage change in the stock market. This relationship does not extend to the incumbent’s party when the incumbent does not run for re-election.

They find no significant relationships between the incumbent’s vote margin and inflation or unemployment. GDP is a significant predictor of the incumbent’s popular vote margin in simple regression but is rendered insignificant when combined with the stock market in multiple regression.

Social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than economic variables such as GDP, inflation and unemployment. Voters unconsciously credit or blame the leader for their mood.

With that backdrop let’s look at what contradictions are we getting from the stock markets. We have been advocating for a large decline in stocks for a long time. If it has to happen it should happen now. We are basing this purely on some historical precedents. If you take the topping patterns as transpired in 1929 and 1987 there were a lot of similar price actions that we are witnessing now.

It had to with the full moon after the Yom Kippur (Jewish) holidays. In 1929 the full moon after the holidays occurred on Oct 18. Stocks fell for the next 16 trading days declining 41%. In 1987 the full moon following the holiday occurred on Oct 7. Stocks cratered for the next 9 trading days dropping 32%. This year the holiday was on Monday this week. The full moon occurs today. Based on structure we already have a topping situation in all the three major indexes that we monitor. If a similar situation occurs in the next 10 to 16 days, we could experience a large market decline.

Please keep in mind that the topping process we underlined is not something that will happen. We are just underlying the inherent risks. There are no guarantees. If it doesn’t happen, what it means is that the markets are not following the same analogous similarities to the prior periods but is following a different path.

The election clearly and curiously seems to hang on the topics of how to solve the virus and the economy. The next two debates should be interesting and would assume will happen with better rules and order. Trump should continue to entertain the debate or let’s say keep us amused.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.