Equity traders grappling with a tough decision
Trump's reluctance to commit to a peaceful transfer of power following the November 3 election emphasizes the slate of risks around the vote. Ultimately, it won't be up to him whether he stays or goes but there are a mess of scenarios where there is a drawn out fight around the legitimacy of the election.
If you take the long view, it doesn't really matter. Eventually the Presidency will be decided -- very likely before inauguration -- and companies will continue to operate and make money in the meantime. The outcome will be disputed by the losing side and that will further erode bipartisanship and the US will continue to split. But all that's happening anyway and unless it turns into an all-out civil war, then you can argue for riding it out, especially if you believe that equities are undervalued in the medium term.
The argument for getting out of the way is also persuasive. One reason is that brokers are cutting leverage. Interactive Brokers on Tuesday said it will increase margin requirements by as much as 35% above normal margin requirements leading up to the election. It will be phased in starting Sept 28.
Given that this market is running on cheap money, a cut in leverage is going to lead to selling. IB is just one broker but I don't think they will be the last.
In terms of the election itself, there are a whole range of scenarios that are negative for stocks. Biden is pledging to raise corporate taxes "on Day 1" and the odds of a Democratic sweep are pricing around 50%. Now that's going to be a lot tougher said than done, given that corporate America has bought off congress for a generation but it's a risk. A equal one is greater regulation.
Ultimately, those who are selling now will be looking to buy a dip at some level, post election. The call for now is whether you want to get out of the way now, or risk watching stocks continue to fall into the election; especially with a stimulus package now dead and virus cases likely to continue to rise for months.
I think the preponderance of risks is going to push more and more people to the sidelines, or at least into defensive positions.
As for FX, the commodity currencies are already making a good technical case for further retracements. That's where I would start.
