Intro: Get the popcorn ready as Hillary Clinton and Donald Trump square off in the first Presidential debate Monday night. We have multiple Central bankers and Fed members making speeches throughout the week and OPEC is meeting in Algiers.
Presidential Debate: On Monday (9/26), we have our first Presidential debate between as South Park puts it, “A Giant Douche” (Hillary Clinton) and “A Turd Sandwich” (Donald Trump). Currently the markets are pricing in a Hillary Clinton victory. If Donald Trump appears to significantly win the debate, we will likely see volatility in the broader markets. The reason being is that with Clinton, the markets already know what they are getting as the status quo keeps going and no real changes. A Donald trump win means a breakup of the status quo and uncertainty around his policies which translates to volatility in the markets.
Certain sectors may be affected from the debate if they are discussed by name and that respective candidate looks like they won. For example if Clinton looks to have won the debate, and talks about what specifically she will do to reign in price hikes by pharmaceutical companies, we may see that sector fall. If Trump explains what regulations he will eliminate such as for natural gas or coal, and he looks to win the debate, we can see these companies have a boost in the days ahead.
In the latest CNBC Fed Survey, Trump is seen as being better for the economy than Clinton. However, Clinton is seen as being better for the stock market. I beg to differ as I believe the stock market will be higher under Trump. It’s not Trump’s plan to cut corporate taxes but his plan to repatriate corporate profits at a one-time tax rate of 10 percent that will drive the stock market higher. There is now over $2.5 trillion in cash overseas according to the forecaster Capital Economics. In 2004, the repatriation tax break saw companies use that money to buy back stock and increase their dividend instead of increasing capital expenditures and hiring more people. It’s really hard to believe that another tax holiday would be any different. This in my mind would send the market higher as we would see significantly less shares outstanding across the board. Whoever does win the debate, the college graduate saddled with student debt hoping for a job living in his parent’s basement will continue to see his only option is to become a waiter/bartender.
Additionally, if Trump were to win, you could see a shakeup at the Federal Reserve as he would likely replace Janet Yellen. He would potentially appoint somebody who would be more hawkish and inclined to normalize interest rates rather sooner than later. This move would initially strengthen the US Dollar and weaken the price of oil (priced in US Dollars). The savers would probably be a little happier as their bank accounts would potentially gain more interest compared to the miniscule amounts they are getting currently.
In both instances, we will likely see an increase in aerospace and defense spending since Clinton is a warmonger and Trump says he will strengthen the military. Infrastructure stocks may also get a boost if one of the candidates will specifically say what they would actually build if they were to become President. This isn’t an end-all list but just some highlights as to what each candidate may do for the broader markets. This is also NOT an endorsement of either candidate.
Central Bankers Speak: Across the world, investors will be listening to the heads of central banks speak. On this week’s agenda include ECB President Super Mario Draghi, Swiss National Bank Chairman Thomas Jordan and Bank of Japan’s Governor Haruhiko Kuroda. Traders will be listening to each central bank for additional details to their quantitative easing programs. Recently, the BOJ announced that they will be working on an experimental steepening of the yield curve. Investors are wondering how specifically they plan on reaching their target interest rate level. Since the BOJ is running out of government bonds to buy, it would not be much of a surprise if they decided to increase their ETF buying. This would inflate the price of Japanese equities. With Draghi speaking, investors will be looking to see if he mentions similar tools to stimulate inflation similar to what the BOJ is doing. Like Japan, the ECB is slowly running out of government bonds to buy and could always expand to ETF’s or lower rated debt. The effect if any one of these bankers announces certain moves would have equities up across the world. And as we seen before, not just equities but commodities, precious metals and bond prices would also go higher.
FOMC Members Speak: Domestically, we have a few FOMC members speaking this week. One of the three Fed members who voted for a rate increase, Esther George, is scheduled to speak. Janet Yellen is also scheduled to speak on Thursday (9/29). Investors will look for any hints as to when the next hike will be and how swift the interest rate hikes may be in the coming months. The longer the Fed puts off raising rates, the higher the stock market goes. Hopefully when Steve Leisman or another reporter asks Janet about inflation and its correlation to interest rate hikes, we don’t get a rambling incoherent answer.
In a side note: We always hear that the FOMC does not want to raise rates until they hit its inflation target of 2%. Because of technological advances, the costs of certain goods have gone done, but the drop in price wouldn’t be called deflation. So when your monthly cell phone bill goes down, or your taxi ride cost is lower because of new technologies, this is not factored into the model which is why the 2% threshold has not been hit in years. It is definitely a great excuse for the Fed to use their models saying inflation has not hit their target, continuing the punch bowl for years to come. Let’s not forget, in 2015 when the Fed raised rates for the first time since 2007, they projected to raise interest rates 4 times in 2016. We are still waiting for the first rate increase.
OPEC Meeting: OPEC is holding an informal meeting this week in Algiers, including non-OPEC member Russia. Rumors last week had the Saudi’s agreeing to an output cut to boost prices as long as Iran would freeze current levels. Whenever we hear sources coming out saying we have a potential agreement, oil shoots up. Usually the same day, another source comes out denying the rumor sending oil back down. In my opinion, as long as politics play a part of the deal and as we all know, none of them get along, do not expect a deal at this meeting or in November, which will send oil lower. The lack of action will continue to hurt the energy industry but help airlines and the consumer, who then has more cash to spend on big ticket items.
GDP: On Thursday (9/29) US 2nd Quarter GDP is released. Investors will be able to see how much of a recovery the US has had as the result will also feed into the Presidential election. Should the number come in higher than expected, we can expect to see equities go higher. If GDP is less than expected, we may see equities fall as investors will believe the economy is not growing as fast as expected. However, since all rules are out the window with the FED, a lower GDP reading could signal to the Fed to keep rates lower for longer and change their trajectory on raising interest rates, pushing the markets higher and Treasury Yields lower.