Are the markets ready for Uncle Joe?

The polls show that the gap between Biden and Trump is growing faster than the Mexican border wall. Before the pandemic outbreak, the working hypothesis was that financial markets were pricing Trump's re-election positively. Since March, the likelihood that Trump spends four more years in the White House is low, and even his closest supporters are resigned with the idea a change may come. So, are markets ready for a new President?

Earlier this week, the leading stock indexes showed a lot of optimism amid President Trump leaving the hospital. Seemingly, markets start slowly to aggregate the information related to a scenario in which Biden will get the keys. Interestingly, investors believe in a positive outlook for the financial markets in the case Biden wins. It was a massive paradigm shift compared to a few months ago when most analysts were forecasting an apocalyptic dip if Trump losses in November.  

The latest unemployment numbers look good, and the new jobless claims are at the lowest level since March. And, yet the number of believers in Trump's re-election is getting lower by day.

Biden's tax plan would increase taxes which were cut by Trump.  In normal conditions, this policy would send a negative signal to markets. Thus, there are some hopes for additional policies that could boost the economy. Analysts expect that Democrats will increase spending at the governmental and state level. This inflow of monies could boost consumption and juxtaposed over a continuous quantitative easing, could support further the stock market.

But, things will change for sure, and if Biden gets in the White House, we could see some rebalancing amongst the leading stocks.  If currently, technology stocks are the clear winners of the pandemic, after November we could expect a reshuffle. Therefore, it is the right moment for a strategic reallocation of portfolios. Decreasing the weight of momentum strategies and increasing the importance of procyclical stock could constitute a righteous alternative.

Our future cannot depend on the government alone. The ultimate solutions lie in the attitudes and the actions of the American people. Joe Biden, Presidential candidate

Market overview

The market gave the impression in September that a big selloff was unfolding. But, after a significant dip, the stock market recovered spectacularly amid the second wave of coronavirus pandemic. The main driver for this turnaround is the perspective of a new stimulus package. This package includes a bailout for the leading American airliners, which face bankruptcy due to massive turnover losses. The optimism observed on the stock market impact positively other markets, including commodities and Bitcoin.

Volatility level seems abnormally low, given the complex puzzle of information affecting the market prices. The only signal that could trigger a warning is the high correlation amongst the different markets.  Seemingly, market-makers are acting homogeneously across the various clusters. Therefore, we could witness significant swings when a decoupling takes place.

Focus:

Regeneron

Regeneron Pharmaceuticals is a New York-based biotech firm with over 30 years of history. Its leading product is the REGN-COV2 antibody cocktail, which was administrated to President Trump, following his infection with coronavirus. The results of the Phase 3 testing indicate that Regeneron's cure reduces the viral level and improves the symptoms.

Regeneron's share exhibited a sustained positive trend since March 2020. Trump's announcement about his health being improved by Regeneron's solution did not generate a sudden bubble. But, there is no doubt that Regeneron is a stock to follow. If the vaccine takes longer than expected, Regeneron may become the only solution to tackle the pandemic and market will deliver the appropriate value.

Focus:

Airlines

The new stimulus package includes a bailout for the leading American airliners. If approved by the Congress, it could constitute a fresh start for this industry hardly affected by the pandemic. Airliners were among the doomed stocks that did not benefit from the quantitative easing and the market rally observed since March. If the bailout is sufficient to cover the time until a cure or a vaccine for COVID get approval, then airliners’ stocks might be significantly under-priced.

Commodities:

Oil

Last week of September was a not a good one for Crude oil, its market price dipping below 40 USD.  This week oil prices experience a rally. OPEC announced that based on their estimations the problem of excess-supply is behind. If another glut is unlikely it means that all the conditions are reunited to build momentum in the long-run. The only issue could be that oil price resurgence could prevail over the economy reopening, thereby hindering the speed of economic recovery.

Cryptocurrencies:

XRP

Before the pandemic, Ripple had a positive outlook. During the March outbreak Ripple’s price plummeted by over 50%. A significant resurgence occurred in August, followed by a gradual decay towards its level from last year. Recently, Ripple announced that it will offer lending capacities and dedicated credit lines to its users. Lending is a key feature for cryptos in order to get the upper hand in the competition with the fiat currencies. The new inflow of XRP could generate a positive trend, if the demand for such products is there.

Market outlook

Nasdaq continued to evolve into positive territory above 11,000 while the Dow Jones went through a strong recovery reaching 28,500 points. We expect to see the leading stock indexes following a positive trend over the next week, but this could mark the beginning a bearish pattern anticipating a significant swing in November.

The Gold ounce was oversold and consequently the price has built momentum amid an optimism across markets. Gold price will be influenced in the short term by the systemic drivers and in the long run we could witness the expected rally.

Bitcoin’s price ended the week above the 11,000 level. The outlook is still unstable despite the recent enthusiasm. The anticipated results of the US election show that the leading crypto-currency has good perspectives to attract more investors.