Contested Election Is Worst Case For Markets: Invesco's Hooper

We're going to speak with Christina Hooper, chief Global market strategists for Investco. They have over one trillion dollars in assets under management, so they're in all of the markets. Christina, thanks so much for joining us. Again, we always appreciate having you on here. What kind of what's your base case scenario for when we wake up tomorrow morning? How are you thinking that this might play out? Well, I have to say, and Paul, it's great to be with you.

Thank you for having me. I have to say that market strategists learn along early in their careers never to prognosticate about elections, So I have no base case scenario in terms of the election outcome. All I have is is if this happens, then we expect this to happen. And so if we were to see a Biden sweep, we would expect to see UH some probably the largest fiscal stimulus package of any potential scenario. Um. But we would also expect to see more controls on the spread

of the virus UH. So we would expect more of the cyclical parts of the market to perform well. If we were to see a Trump UH win, we would assume he would keep the Senate as well, um, and we would expect some kind of a relief rally for the negative assets associated with Joe Biden. So, for example, traditional energy would be one that would probably come under

pressure if Biden were to win. And then, of course, if there is a contested result of some kind, we would expect gold and treasuries to perform well, and perhaps the Japanese Yet so UM, not prognosticating on the election, just have our scenarios laid out for what happens in the case of a particular election outcome. I just want

to point out a headline that costed the Bloomberg. In the last few minutes, the US early voting topped one hundred million ballots according to the latest data from the Elections Project, So that's pretty phenomenal, the first time ever that a hundred million ballots have happened early Christina. Is there consensus? So there may not be consensus on what percentage you know, chances this outcome happens, or what presented chance this outcome happens, but is there a consensus on

how the markets will react in any given scenario. Well, I think there's a content consensus that in a contested election, that would be a worst case scenario for markets. As we know, markets don't like any form of uncertainty, and that of course includes and is especially the case in presidential elections. So that would be an environment where we'd

likely see a stock market sell off. In fact, we could go back to two thousand sixteen and get a little taste of what we might see in with a contest election, because recall that night, the conventional wisdom was that markets were surprised and disappointed with a Trump win um and that's why stock sold off. I would argue that in fact what happened was that markets were nervous because Hillary Clinton didn't concede on the night of the election.

She didn't actually give her concessions speech until the next morning, so we got a taste of that fear of a contested election, and we saw stocks sell off. So that's I think what is most likely if we see a contested election this time around. You know, there's still so much uncertainty I guess around this election at this stage. Are you surprised that we're seeing the stock market behave the way it is today? Up two and I am surprised, And that sets to me that the stock market stock

market is expecting a decisive victory. Um, it might be disappointed, but that's certainly the way it's behaving right now, and I'm shocked that there doesn't seem to be a lot of hesitation with that. But sometimes the stock market knows better. Christina, how long do you wait before you put on a trade in the event the outcome is clear? So in the event that we know what's going to happen in January, do you put one on immediately? Do you do wait until January? Well, I had to give the caveat that.

We always encourage long term investing mindset because most investors had a long time horizon, But the reality is that if we go back in history, what we often see is moved made in advance of an administration coming into office. UM. It's really funny, but a lot of the things you would expect to see when a president is in office doesn't happen. It's anticipated, and there are moves made before they come in UM. But in fact the result is

quite different. And I'll give you a perfect example. There was so much nervousness and apprehension around healthcare stocks before UH the Obama administration came into office, and in fact what we saw was that healthcare was one of the top three performing sectors for several years during UH President Obama's time in office. Similarly, there was a lot of excitement about energy in advance of President Trump coming into office.

There were a lot of policies that he was promoting that would be supportive of of traditional energy, of fossil fuels, and in fact, energy over the last several years has been the worst performing sector in the SMP five. So quite often those moves we see are made in advance. It's akin to um, buy on the rumor sell on

the news. Remind us why healthcare didn't perform so well was that the market didn't anticipate that the President would be able to get the Affordable Care Act through, or that the Affordable Care Act would be bad somehow for healthcare stocks. It was concerned that the Affordable Care Act would be bad for a lot of healthcare stocks, and that's why we saw a lot of even as it

expanded the base of customers it did. Um, there were particular concerns about specific industries, and we could very well see that again. And there are concerns today about what might happen to pharmaceuticals uh in a in a Biden administration, so we might very well see something akin to that

now as well. Um. But again I have to say that quite often these traits are relatively short lived, and when a president actually does take office, we can see a very different sector performance than we would have expected in what would seem intuitive. Such a great reminder, because it can be hard sometimes remember exactly what happened four years ago, and and and before that and after that.

Christina Hooper is investcos Chief Global Market Strategists, reminding us there that all sorts of sectors have potential moves ahead of them. Time now to welcome somebody who knows a lot about elections, politics, and this landscape in particular. Wendy Schiller joins us. She of Brown University, of course, and a friend to the program and to the station, really chair of political science again at Brown University. Wendy, what is your base case now, Hi, you just get right

to it. I think here's what I mean. I I think we'll we'll know from some congressional races. I think, signaling earlier than even the presidential races. We know that there's a lot of people who are elected in what we call competitive swing districts, like Virginia, for example. We have Illinois. We have a couple of races in Texas that look really tight and are surprisingly competitive. We have

a couple of Minnesota. You know, if things start to swing in congressional districts sooner for the Democrats, then you start to think, okay, maybe Biden will have a very good night. But you know, we'll know about Florida, We'll know about North Carolina, we'll know about Arizona, and we'll know about Georgia probably but before midnight tonight and all of those swing for Trump. If Trump looks really healthy in those states and looks like he could win, then

I think things get very very dicey for Biden. So that's a big sort of romina. And Biden only has to win one of those states, you know, one of those four states, or look like he's in the lead, in a considerable lead in one of those states for him to sort of have a more relaxed night. But if he if Trump wins all of them or looks like he's going to win all of them, I think that that tells us that this sort of blue wave we thought might emerge isn't going to emerge the same way. So, Professor,

how do you think the Senate will shake out? Is there in fact, you know, the markets are kind of suggesting here today that a blue wave may in fact, uh be in the cards. How do you think that might go in the Senate? That that that's a great question, Paul, because you think about the Senate and you think, you know,

Mitch McConnell is totally immune this time. You would have thought if there's a big blue wave, you know, the guy has really been the poster boy for the campaign against the Republicans controlling the Senate in Mitch McConnell, and he's gonna probably breathe to re election. So I'm a little suspicious of that big blue way for the Senate. Iowa looks neck and neck. You know, we had a recent poll that's very credible that looks like Johnny Earnest

can pull it out and stay. You know, if cal Cunningham can win in North Carolina, that suggests probably that the Democrats might get to fifty one if they can win Maine as well. They're probably gonna win Arizona, probably gonna win Colorado and lose Alabama. So they're looking at probably minimally of fifty forty nine Republican or a fifty

fifty fifty nine Democrat. So I think that's where this's you know, we don't know, and I think that's where North Carolina becomes so important, even even if we don't know Biden Trump. You know, if cal Cunningham looks like he's really gonna win that race, that suggests better things for the Democrats across the board for the Senate. Say some of that again, When do you say Arizona is definitely going to go Democrats? In Texas? What do you

say about Texas? Oh? No, no, So I think Arizona from Mark Kelly, I think he's been polling very consistently ahead of Martha mc sally. But you can imagine let's say people voting for Mark Kelly, a former AST or not UM, you know, and not voting for Joe Biden, you know, voting for Kelly because they want him over Martha McSally, and then voting for Trump in Arizona. So you can see the Democrats winning the Senate in Arizona

but not winning the presidential race. UM. And Texas is you know, shocking, right, The turnout in Texas has been absolutely shocking, and but it looks like John Cornyn's comfortably ahead of Edguard that the challenger there. But I think that the issue is that Trump is only basically one point ahead in Texas, which is just you know, if you think about politics, just stunning. Same with Georgia, and Georgia will be interesting because the dude does not get

or more against as off. Then you've got to runoff elections in Georgia in January, and I think that's really going to be some interesting voting dynamics. So it's possible the Senate Democrats could ultimately end up with a fifty one or fifty two majority. But I still think it's a bit of a lung shop. So, Professor, if the presidential election becomes contested, what is you're kind of base case for how it may play out. I think we

could be faced with an unprecedented historic situation. I think, you know, if we have a tie, For example, if in the electoral College in December it's actually a tie, it goes to the newly elected House, which is expected to be more democratic. However, the Republicans still control more votes in state delegations than the Democrats, and that probably isn't going to change. So you could conceivably have literally

the House electing or re electing President Trump. But in the Senate, if it's nine with the new Senate and it's new Democrats, then they may elect Kalma Harris as vice president. I mean, it's really quite I mean it's stunning.

It's a really stunning thing. So I think so many things have changed already in whether Trump gets re elected or not, as obviously monumental, but even if he gets re elected, I think the Democrats have shown they know how to mobilize voters, and I think they've shown that some of these states have changed a lot in terms of demographics, and they are going to be more competitive moving forward, which changes the nature of politics going too,

because we know that politicians look at the next election the minute the selection is over, and so when we start to think about what the balance of power might be in the Senate in the House in two these games the Democrats appear to be making among voters in these states changes a lot of the dynamics, which will probably change some of the policies coming out of Congress. Yeah. I mean it's really the African American vote, right, Wendy. And how much more of that we'll see. We're already seeing,

you know, a lot more engagement. Yeah, So, I think African American voter has always been key. You know, North Carolina and Georgia had about sixty African American turnout in it wasn't enough because those numbers were not hit in in Wisconsin, Michigan, and Pennsylvania among African American voters, and they and you know, they may or may not get there. If they get there, I think Biden wins relatively easily.

But what's interesting is suburban white women of all educational levels seem to be really vehemently at the moment against Trump and the polls, and it could be that instead of the back vote really being key in the Midwest, it ends up being white women, which would be really an interesting shift. You know, a mirror eighteen when white the majority of white women voted for Democratic candidates. But it would change the nature of the Democratic coalition if

that were the deciding factor. So that's what I'm looking for. I'm looking for a turnout, particularly in particular counties in Michigan where we still have a lot of people are going to vote in person, and certainly in Pennsylvania. Wendy were really out of time. But I am desperate to ask you, given the amount of of of judges at the state level made us be level and and and obviously federal level that the president has overseen get on the court, does that give him an advantage in any

court cases? It may, although you saw in Texas the Texas State Supreme Court refused to throw out a hundred seven thousands in ballots and Harris County Democratic County and George W. Bush judge just yesterday a federal judge, a court judge also refused to throw those ballots out. So I don't know that you're going to see the kind of rulings that Trump expects to sort of throw out hundreds of thousands of ballots that were cast, presumably for Democrats. Wendy,

thank you so much for joining us. We appreciate we know you're busy today on this election day. Wendy Schiller, chair of the Political Science department at Brown University, located in Providence, Rhode Island, really appreciate you coming on. And Vanni, It's gonna be a fascinating day of fascinating evening and I wonder what we're gonna be talking about tomorrow, but we will see. Well, it is a decidedly risk on

day today. As Greg Jarrod was just reporting equity markets up over two bonds selling off here, let's get a sense of, you know what this means in the bigger picture. We could do that with our good friend Nick Holas, co founder Data Trek Research. Nick, thanks so much for joining us here. We had a big sell off in the equity markets last week. This week kind of a turnaround here in a big move today. What are you

reading into it? If anything? You know? I think the thing we can take away from today and yesterday as well, is that the market is looking forward to having the election behind us and to focus on fundamentals, which during this earning season have been remarkably good, where it really record or near record levels for earnings beats and earnings amounts, and the profits are coming through. But everybody's a little bit cautious about what comes next, and so estimates aren't rising.

But the baseline that we're having right now in terms of earnings is excellent. That said, if the pandemic continues to ravage the nation as it is now and we don't get widespread vaccine, you know, delivery, let's say until sometime next year, can results continue to impress. Yeah, it's

it's an excellent question. And unfortunately we have to go back to the political sphere to answer some of that because the missing link in terms of earnings for the next couple of quarters is going to be fiscal stimulus. Monetary stimulus is less an important factor because it's already

so accommodated. We really have to focus on whether or now we get a another CARES Act, and that is in the per view of the belt Away, and I think we have to really worry a bit about repeating say two thousands and eights, where we had an election outcome, but the election outcome created a change of power, which delayed the Recovery Act until February of two thousand nine, and that's why the market didn't really bought them until

March of two thousand nine. So I am cautious about that particular scenario that we just don't get stimulus until DC sees a change of power. Yeah, Nick, the you know the other Obviously, the issue out there, arguably the biggest issue is the pandemic and the and the numbers are just going in the absolute wrong direction, and we're seeing European economies shutting down to varying degrees, and so people are concerned that, uh, you know, the US is

just a matter of weeks behind Europe. Here. If that, if these numbers were coming across the tape in March and April, this market would presumably be down significantly. What do you think the market? How do you think the market's viewing this second slash third wave globally? You know, I think you're absolutely right. The the European situation is bad, and it's bad for a bunch of different reasons. The

US has a little bit of a different situation. You're right to cle a. The virus is definitely taking a toll, but I think there's hopefully enough awareness to understand that, particularly in places like New York. We're all based, you know, there is a lot of mitigation efforts still under waste,

still a lot more work from home. Europe did not really embrace work from home the way the US did, and so I am hopeful that the US economy can continue to move along in conjunction with some stimulus that avoids the worst economic outcomes of what's going to happen in Europe, which I agree with you are are pretty profound. So what's the base case make and what industries would you be recommending keeping a close eye on if your

base case scenario does come to pass. So the base case scenario is actually bullish, you know, it does require more stimulus, but it is positive. And against that backdrop, we like industrials very much. They've had a very good quarter, and then we think there's a lot of earnings leverage and industrials large camp industrials going into We also like

small caps over large caps. The one area where cautious on its technology Tech has had such a strong year that it's coming up against what we call very tough cumps. It's very hard to get earnings leverage when you have a blowout year and the next year goes back to normal. So we don't like technology right now, but do like cixicles, like industrials and small caps. We'd also stay away from

financials because of the very low rate environment. A ten year yield that goes back to one percent just isn't good enough to generate a lot of marginal earnings for the financial sector. So it's interesting, Nick, You know, I think a lot of people are kind of trying to figure out when they do that rotation, and you know, out of those big tech growth names that have worked so well for so long, arguably since the financial crisis, but appears that the market is in fact already beginning

that rotation. Is that what you're saying, yes, absolutely right, That is that that's exactly what we're seeing, and it's for all the right reasons. It might be a little bit counterintuitive to see companies report blow at earnings and the market turned their back on them, but at the same time you have to look forward, how does tech generate the same kind of earnings comps and earnings leverage? Next year that it did this year. If things, as we all hope, begin to go back to normal, you know,

you had absolutely tremendous demand for MacBooks and iPads. iPhones might take some of the slack up in Q four for Apple, But what are you looking for next year? How are you gonna replicate through the upgrade cycle that we got in I don't think you can and make just you know, very quick answer. Does any of this depend on who's the next president or of what color the next Congress is? You know it does to some degree. I would tell you that obly enough, markets don't like

gridlock as much as the cliche seems to say. Market does better since World War Two, when either them of Crats or Republicans hold the White House and converse, a split decision isn't necessarily a great outcome. Yeah, that's so interesting because we hear that quite a lot. That the opposite that is Nicholas, thank you. Nicholas is co founder of Data check Research, our Data Track Research. As I

should say, we all know that Data Track Research. Nicolas co founder of that, and of course Paul, you know that's we hear that quite a bit. You know, good, good markets like good luck. Markets like good luck, but you know you have to wonder why that is or what the origin for that sort of Yeah. I love having Nick on. He really puts things, I think very clearly here and he is clearly in that rotation camp

in the cyclicals. Well, it is time to have a look at the bond market because there again we are seeing a few basis points in moves. It would appear to be a risk on move. What will ask the expert? Iro Jersey is chief interest rate strategist for Bloomberg Intelligence, and he joins us now I wrote, what is the bond market saying to you today? Yeah, it is a risk on of like you mentioned, Vonnie, I think importantly, Um,

I think the bond markets giving us to two important signals. Firstly, is if we close where we are right now at around eighty eight basis points on the tenure yield, we are now targeting the um the June yield high, so somewhere near nineties basis points. So so we're looking at maybe another little bit of a sell off. And I think that that could happen pretty quickly if there's kind of an uncontested election, and if you know, Joe Biden

wins the presidency. I think regardless of who who controls the Senate, I think if the White House changes hands and it's not a contested election, I think that's a little bit more of a risk on and for bond deals. That means slightly higher bond deals. So where do you think the tenure could go arrive? You know, we've spoken to some folks over the last day or so that says, you know, you know, one in a quarter UH is not out of the discussion, at least within your term.

Do you do you have that kind of sense? Yeah, I think one in a quarter at one point to seven percent is uh. It was the high back in UH to yield tie back in March. I think that that's uh, that's possible to get there. I don't think near term. I don't think that's a end of two thousand twenty type of thing, because I think in order to get to those type of levels, we have to

increase optimism on what's the future of growth. You have to have more optimism on whether or not we'll have a vaccine in the first half of next year, like like, like, there was a time when I thought that in the first half of twenty twenty one, we could get to those type of levels, but that was predicated on an early vaccine release and the fact that we don't have UM. It doesn't look like we're gonna necessarily get an early vaccine UM and a quicker return to normalcy. I don't

know how how we get there now. It's not out of the question, though, Paul, because one of the pieces of news that we're gonna get tomorrow morning is treasury supply. So how much in terms of bonds is the Treasury Department going to have to issue now? Now they've decreased their bond issuance forecast for this quarter because there wasn't a fiscal stimulus prior to the election, UM, but they increase They basically moved that back to the first quarter

of next year. So if we do get another trillion dollars, you know, to where I should say, another two trillion dollar stimulus plan in the first quarter of next year, they would have to increase additional bond issuance to fund it, and that could be an impetus to push yields above one percent once again on the ten year yield. Well, funny you should mention because we also have an f

O m C meeting this speet era. And while typically the Fed wouldn't try and do anything at all to influence markets that we can an election, you have to wonder if at some point in the future the FED chair won't have to roll back a little bit what he said about not raising rates for years. Well, I do think that that's uh, that's still in a card. I don't see the Federal Reserve hiking interest rates probably

until at least three even in an optimistic scenario. Um. And and you know that's not completely dissimilar to what happened after the the Great Financial Crisis. The fact is is that we'll probably have, you know, growth that's not going to be particularly high. You're not gonna have inflation that's going to spike up that you're going to need to arrest that by increasing front end interest rates. And and I think that the Federal Reserve would would not

mind the yield curve to steepen a little. But I also think that they're worried that if, because of all this supply and you have better growth expectations, if the yield curve were to move significantly so that those numbers that Paul mentioned, if you get above one and a quarter percent very quickly on the tenure yield. The Federal Reserve could take some action like buying more long term bonds instead of short term bonds in order to slow

down the pace of increase in in long term bond yields. Um. You know, there's not something that traditionally they've done, but as part of their monetary policy framework, they want to ensure that interest rates are low and borrowing clusters are low for at least a little while until we get over the hump of um of growth and we start to see job gains that are consistent and wage gains that are consistent with their um with their dual mandate

of full employment, as well as stable inflation. So are you mentioned, you know, buying the Fed buying bonds give us a sense of kind of what their activity has been to date. Have they been in the market, have they been active is or is it just more a little bit of a show. Well, well, they've been buying every day because they've they've been buying eighty billion dollars

a month of treasury securities. But most of those treasuries that they're buying are are five years and and shorter and maturity, so so there's not a lot of market risk in in that um in that part of the market. So so while they're buying a lot of bonds on a dollar basis, they're not buying a lot of market risks.

So one of the things that we think is possible and and and we'll be talking about this in one of our our research reports later this week, is they can reduce the amount of those short term bonds that they're buying to buy longer term securities again in order to buy more market risk and make sure that the market doesn't sell off in an uncontrolled fashion, which is

a risk. I mean, when you think about what happened during the Taper tantrum, and and even in two thousand nine, um after after he hit the yield loads, you wound up having very significant increases in ten year yields, and that did have an effective of slowing down the economy a little bit and people were a little bit less likely to borrow money when ten year bond yields, you know, rose by a hundred basis points and in just a couple of months. Our Jersey, thanks so much for joining us.

We always appreciate getting your thoughts here on all things in the bond market. Ira Jersey, chief US interest rate strategist for Bloomberg Intelligence, joining us here. A little bit of a lift to a rates, a little bit of a stepending Vanni to the yield curve here just over the last several days, yes, for sure, and we did get that big move last week, don't forget polls. Yep. Yeah,

very interesting. So I have to see how the bond market reacts here throughout the day, uh, and then of course tomorrow and over the next several days, we'll see, you know, to get a sense of how uh the election is going in into what extent it's contesting. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever a podcast platform you prefer. I'm Bonnie Quinn. I'm on Twitter

at Bonnie Quinn, and I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.