Choose One

In less than 2 weeks the voting will be done and hopefully we will know who won. Of all the possible outcomes, one that is too close to call on election night is quite likely the worst possible outcome. The anarchy that could result from a contested election result could be too much to bear, both professionally and personally. Whoever wins, let them win convincingly.

The stock market is a discounting mechanism, that is, one that anticipates the future and acts accordingly. Of course, that does not mean the market is always right, but the market will begin to reflect a view of events, like elections, if those events appear ‘foreseeable’. What we have seen over the last couple of weeks is the market finally making a bet on a Trump victory, with increasing odds of a red sweep. Just this week UBS presented their election scenario odds:

Piper Sandler has updated its view similarly. Piper views a red sweep as the most likely outcome at 45%, while a Harris Presidency with a split congress is the next most likely at a 35% probability. They view a blue sweep as only a 10% probability. And a Trump Presidency with a split congress at 10%. The rationale appears to be based on the view that if Trump wins, that victory will likely carry over to the hotly contested House of Representatives. A Republican-led Senate is considered a very high probability. We will find out of the market is correct post-election day, hopefully by the next day.

Does Wall Street Care?

You’d better believe it does. A red sweep is likely to celebrated on Wall Street as the Trump administration would be free to reduce regulation, which is good for business in general, and energy and financial companies in particular. Trump is also considered crypto-friendly, so Bitcoin could also continue to rally. Under another Trump term, the Trump tax cuts are at least extended and possibly made permanent and corporate tax rates could come down further.

Trump has talked about extensive tariffs, but it is not clear just how serious he is. Nonetheless, at the margin, we should expect more tariffs in a Trump Administration and that would logically impact industrials, who have typically used foreign operations and technology companies, who would logically lose some access to foreign markets in a tit-for-tat tariff war.

In a Harris administration with a split Congress, it is easy to envision gridlock with little actually getting accomplished. One of the larger impacts would likely be the expiration of the Trump tax cuts, resulting in higher rates for those in the top brackets. Existing tariffs will likely remain in place, and there may be a few additional tariffs, but nothing like what Trump is likely to deliver.

What Doesn’t Change?

As the Committee for a Responsible Federal Budget (CRFB) states in a recent report: “The next President will face significant fiscal challenges upon taking office, including record debt levels, large structural deficits, surging interest payments, and the looming insolvency of critical trust fund programs.”

Structural fiscal deficits and looming insolvency of critical trust fund programs (Medicare and Social Security) are issues neither party wishes to discuss. It is frankly an easy way to lose an election, so it is largely ignored by both sides, and the platforms of each candidate reflect that. The CFRB estimates that the central tendencies for the required increase in debt under each administration range from $3.5 trillion (Harris) to $7.5 trillion (Trump). Admittedly, there is a very wide range of estimates for each candidate, depending on the assumptions for what each administration will attempt, and might actually implement, from their respective platforms.

It is difficult to envision this issue remaining under cover for much longer. In the first 3 weeks of October, the national debt increased by $473 billion, and the U.S. now pays over $1 trillion annually in interest on U.S. treasury securities. It isn’t hard to see how this trend will become increasingly important over the next few years.

As we stated at the top, the market tends to anticipate the future and the bond market may be doing just that right now. Since the Fed lowered the Fed Funds rate by 50 basis points (a basis point is 1/100 of a percent) back on September 18, the rate on the 10 year bond has actually increased by roughly the same amount. That means that mortgages today have higher interest rates than they did a month ago.

It is important to note that while the Fed controls short term rates, the market controls longer term rates. There is a point where the markets will step in and enforce more conservative fiscal measures. This lesson was most recently learned two years ago by former U.K. Prime Minister Liz Truss, who lasted only 44 days in office when the U.K. bond markets pushed back at proposed debt-funded tax cuts.

In less than 2 weeks, we all need to choose one, but no matter who wins, there are some serious structural problems that will only become more urgent to address over the next four years.

Have a contemplative week and let’s go Yankees!

What We’re Reading

U.S., China trade tariffs escalating would be ‘costly for everybody,’ IMF deputy director says

Here’s why inflation may look like it’s easing but is still a huge problem

Time to take profit on some Trump trades, Citi says

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that the future performance of any specific investment or investment strategy will be profitable.

General News

By: Adam