Investors are acting like Democrats have a better chance of winning since the contentious Sept. 30 debate between President Donald Trump and former Vice President Joe Biden.
A positive coronavirus diagnosis for Trump may have sealed the deal. The odds of a Biden win in November have increased to 67% from a pre-debate reading of 55%, according to Raymond James, citing Bloomberg data.
The odds of Democrats taking the majority in the Senate rose to 66% from 55%, Raymond James added.
That could all mean a rotation out of big tech stocks into cyclical stocks and investments that benefit from the expected extra stimulus a Democrat-led government would bring, says Raymond James’ Tavis McCourt in a research note.
Hopes for a big stimulus package—the Democrats had proposed a $2.4 trillion bill—have faded in and out over the last few days in a series of mixed messages from the White House. Trump at first demanded Republicans walk away from the negotiating table. Then he directed a series of smaller, more targeted deals, including one for the ailing airline industry.
On Thursday, House Speaker Nancy Pelosi said a smaller airline deal wasn’t in the offering without broader aid measures.
Raymond James looked at how various traders and macro funds are positioning themselves. They appear to be making a notable shift to smaller cap stocks and cyclical industries.
A Democrat sweep could mean higher tax rates—Biden has vowed to rework Trump’s 2017 giant tax cut. That could take 5% to 8% off annual EPS on an index level, Raymond James said.
Material stimulus could raise longer-term rates, while short-term rates stay near zero. That would be a negative for bond investors because prices move in the opposite direction from rates.
The most bearish scenario for the market and a recovery is a Biden win with Republicans holding the Senate, which would make further stimulus least likely, Raymond James said. “We have viewed an outcome of a Biden win, but with a Republican Senate as the least likely to produce additional, meaningful fiscal support in 2021.”
The status quo on corporate taxes in this scenario would be significantly offset by higher state and local taxes, which would be more severe if localities don’t get help from the federal government.
All of this is seen helping stocks of regional banks, retailers, metals and mining, real estate and industrials. Higher rates boost bank profits and help metal prices, and more stimulus could support consumer spending.
On the flip side are Treasury and corporate bonds, the dollar and energy, as rising rates push bond prices lower, a recovery weakens the dollar and oil prices fall.
Technology stocks, the big winner this year, could see a sell-off if investors move their money from the momentum trade into those cyclical and small caps, McCourt said.
Stocks tend to do well when the 10-year Treasury yield rises 100 points in less than a year. That has happened eight times in the last 40 years, and the S&P 500 had an average return of 12.8%, the Russell 2000 gained 29.3% and the Midcap 400 gained 27.6%, Raymond James said.
Write to Liz Moyer at [email protected]